Legislature(1999 - 2000)

02/08/2000 10:08 AM House O&G

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
             HOUSE SPECIAL COMMITTEE ON OIL AND GAS                                                                             
                        February 8, 2000                                                                                        
                           10:08 a.m.                                                                                           
                                                                                                                                
                                                                                                                                
MEMBERS PRESENT                                                                                                                 
                                                                                                                                
Representative Jim Whitaker, Chairman                                                                                           
Representative Fred Dyson                                                                                                       
Representative Gail Phillips                                                                                                    
Representative Joe Green                                                                                                        
Representative John Harris                                                                                                      
Representative Brian Porter                                                                                                     
Representative Allen Kemplen                                                                                                    
Representative Tom Brice                                                                                                        
Representative Hal Smalley                                                                                                      
                                                                                                                                
MEMBERS ABSENT                                                                                                                  
                                                                                                                                
All members present                                                                                                             
                                                                                                                                
COMMITTEE CALENDAR                                                                                                              
                                                                                                                                
IRS Ruling on Alaska Gasline Port Authority                                                                                     
                                                                                                                                
PREVIOUS ACTION                                                                                                                 
                                                                                                                                
No previous action to record                                                                                                    
                                                                                                                                
WITNESS REGISTER                                                                                                                
                                                                                                                                
WILLIAM M. WALKER, General Counsel                                                                                              
Alaska Gasline Port Authority                                                                                                   
Walker, Walker, Wendlandt and Osowski                                                                                           
550 West Seventh Avenue, Suite 1850                                                                                             
Anchorage, Alaska 99501                                                                                                         
POSITION STATEMENT:  Provided information on IRS ruling.                                                                        
                                                                                                                                
TRAVIS C. GIBBS, Attorney                                                                                                       
O'Melveny and Myers LLP                                                                                                         
400 South Hope Street                                                                                                           
Los Angeles, California 90071-2899                                                                                              
POSITION STATEMENT:  Provided information on IRS ruling.                                                                        
                                                                                                                                
ACTION NARRATIVE                                                                                                                
                                                                                                                                
TAPE 00-10, SIDE A                                                                                                              
Number 0001                                                                                                                     
                                                                                                                                
CHAIRMAN JIM  WHITAKER called the  House Special Committee  on Oil                                                              
and Gas  meeting to order  at 10:08 a.m.   Members present  at the                                                              
call  to  order  were  Representatives  Whitaker,  Green,  Harris,                                                              
Porter,  Kemplen, Brice  and Smalley.   Representatives Dyson  and                                                              
Phillips arrived as the meeting was in progress.                                                                                
                                                                                                                                
CHAIRMAN WHITAKER  announced that the  purpose of the  meeting was                                                              
to clear  the air and  remove any questions  about the  effect and                                                              
validity  of a  recent ruling  from the  Internal Revenue  Service                                                              
(IRS)  in response  to  a request  from  the Alaska  Gasline  Port                                                              
Authority.   He  introduced William  Walker who  would testify  by                                                              
teleconference from Anchorage.                                                                                                  
                                                                                                                                
Number 0115                                                                                                                     
                                                                                                                                
WILLIAM   M.  WALKER,   General  Counsel,   Alaska  Gasline   Port                                                              
Authority,                                                                                                                      
Walker,  Walker, Wendlandt  and Osowski,  explained that  the port                                                              
authority in  April 1999 had asked  the law firm of  O'Melveny and                                                              
Myers  to assist  in obtaining  a  ruling from  the IRS  regarding                                                              
whether port authority income would  be exempt from federal income                                                              
tax.  That request was submitted  to the IRS in November 1999.  On                                                              
January 28,  2000, the port authority  received word that  the IRS                                                              
had granted the  port authority's request for tax  exemption.  Mr.                                                              
Walker  then  introduced  Travis  Gibbs  as  the  person  who  had                                                              
prepared and  submitted the application.   Mr. Gibbs  participated                                                              
by teleconference from Los Angeles.                                                                                             
                                                                                                                                
Number 0216                                                                                                                     
                                                                                                                                
TRAVIS C. GIBBS, Attorney, O'Melveny  and Myers LLP (Los Angeles),                                                              
explained that the  port authority's request was based  on a long-                                                              
held  position of  both  the IRS  and  the courts  that  political                                                              
subdivisions are  not subject to federal  tax.  As far  as the IRS                                                              
is concerned,  that position is  based on either  a constitutional                                                              
or  an  implied   statutory  tax  immunity.     From  the  courts'                                                              
perspective, that  position is based  on a Supreme  Court decision                                                              
that  a  political  subdivision  is  not  subject  to  tax  unless                                                              
Congress specifically directs otherwise.   Mr. Gibbs said the only                                                              
congressional   exception   of   which  he   was   aware   applies                                                              
specifically to  state universities, making them  subject to taxes                                                              
comparable to those paid by private nonprofit universities.                                                                     
                                                                                                                                
MR.  GIBBS said  the port  authority's request  focused solely  on                                                              
whether  or not  the port  authority is  a political  subdivision.                                                              
The  IRS concluded  that  based  on  the definition  of  political                                                              
subdivision contained  in IRS regulations, the port  authority is,                                                              
indeed, a  political subdivision.   Mr. Gibbs  said the  effect of                                                              
that ruling  is that the port  authority is not subject  to filing                                                              
income tax returns or paying federal  taxes.  The ruling is in the                                                              
form of  what is called  a private letter,  which is  submitted to                                                              
the taxpayer  or entity that  requested the ruling.  Under federal                                                              
law, the  ruling is applicable only  to the entity  that requested                                                              
it.  That entity can rely on that ruling.                                                                                       
                                                                                                                                
Number 0768                                                                                                                     
                                                                                                                                
CHAIRMAN WHITAKER  read what  the port authority  had sent  to the                                                              
IRS  requesting  a ruling  that,  "The  authority is  a  political                                                              
subdivision  of the  state  whose income  is  exempt from  federal                                                              
tax."                                                                                                                           
                                                                                                                                
MR. GIBBS said that was the only question asked.                                                                                
                                                                                                                                
CHAIRMAN  WHITAKER  wanted  to know  if  the  ruling  specifically                                                              
stated that  port authority  income would  be exempt from  federal                                                              
income tax.                                                                                                                     
                                                                                                                                
MR. GIBBS  said that  was correct.   In response  to a  request to                                                              
quote  the answer  received,  he  stated:   "Based  solely on  the                                                              
representations  made and  the definition  of  the term  political                                                              
subdivision in Section 1.103-1B [of  the federal income tax code],                                                              
we conclude that  the authority is a political  subdivision."  Mr.                                                              
Gibbs said that means the port authority  would pay no income tax.                                                              
                                                                                                                                
Number 0908                                                                                                                     
                                                                                                                                
REPRESENTATIVE BRICE  asked if the  ruling applied to  taxes other                                                              
than income tax.                                                                                                                
                                                                                                                                
MR.  GIBBS  said the  port  authority  would  be exempt  from  all                                                              
federal taxes,  but that  the ruling does  not apply to  any taxes                                                              
that might be imposed at the state or local level within Alaska.                                                                
                                                                                                                                
REPRESENTATIVE GREEN  wondered if this  response would hold  or if                                                              
the IRS might reconsider it.                                                                                                    
                                                                                                                                
MR. GIBBS  characterized the response  as typical of  the language                                                              
used when the IRS  rules that a case meets all  criteria.  He said                                                              
that as  long as  the factual representations  made regarding  the                                                              
port authority are true, the IRS would not revisit the ruling.                                                                  
                                                                                                                                
REPRESENTATIVE  GREEN asked if  the IRS might  go back  and change                                                              
what constitutes a political subdivision.                                                                                       
                                                                                                                                
MR.  GIBBS replied  that he  was  very comfortable,  based on  his                                                              
knowledge of  the rulings process, that  the IRS will not  go back                                                              
and revisit or try  to change the result.  He  said the conclusion                                                              
is consistent with literally hundreds  of other rulings.  The port                                                              
authority was advised  to get the ruling because  some features in                                                              
its case were unique and because  there is so much at stake.  This                                                              
ruling is  definitive and  binding on  both the  IRS and  the port                                                              
authority.                                                                                                                      
                                                                                                                                
REPRESENTATIVE HARRIS understood  that the port authority's income                                                              
is to be  used for governmental  services, with a good  portion of                                                              
it going to the state and the rest to municipalities.                                                                           
                                                                                                                                
MR. GIBBS said  that is correct. Net revenues  will be distributed                                                              
among  municipalities  according to a formula set  out in the port                                                              
authority ordinances.   The money is  to be used by the  state and                                                              
municipalities for general governmental purposes.                                                                               
                                                                                                                                
REPRESENTATIVE  HARRIS speculated  that the  IRS might have  ruled                                                              
differently  if   revenue  had  not   been  earmarked   for  basic                                                              
governmental service.                                                                                                           
                                                                                                                                
MR.  GIBBS  said  one  of the  legal  standards  for  a  political                                                              
subdivision  is  that   it  be  controlled  by   state  and  local                                                              
governments,  and that  it otherwise  have a public  purpose.   He                                                              
said  the port  authority attorneys  spent  a great  deal of  time                                                              
establishing  the public  purpose of  the authority,  and had  the                                                              
revenues  gone  to  something  other   than  general  governmental                                                              
activities, that would  have put more pressure on  the question of                                                              
whether the port authority serves a public purpose.                                                                             
                                                                                                                                
Number 1345                                                                                                                     
                                                                                                                                
REPRESENTATIVE SMALLEY  wanted to  know if the state's  Department                                                              
of Revenue had  been involved in determining the  percentages that                                                              
go to the communities and to the state                                                                                          
                                                                                                                                
MR. WALKER  said the  statute that  provides for  the creation  of                                                              
port authorities  does not require  that funds go  anywhere except                                                              
to  the   port  authority.     This  port  authority   voluntarily                                                              
established a sharing  arrangement whereby 60 percent  would go to                                                              
the  state and  30 percent  to the  communities,  with 10  percent                                                              
retained by the port authority.                                                                                                 
                                                                                                                                
CHAIRMAN  WHITAKER  asked  if  the  authority  had  discussed  the                                                              
allocation  with  the Department  of  Revenue and/or  other  state                                                              
officials.                                                                                                                      
                                                                                                                                
MR.  WALKER said  they did,  and  that they  kept those  officials                                                              
apprised  that the  goal  of the  port  authority  project was  to                                                              
benefit all of Alaska.                                                                                                          
                                                                                                                                
CHAIRMAN WHITAKER asked Mr. Walker  about the impact of the ruling                                                              
on the project's bottom line.                                                                                                   
                                                                                                                                
MR. WALKER said estimates place the  impact somewhere between $2.3                                                              
and 3  billion.   He explained  that the  ruling frees money  that                                                              
would normally be used to pay federal  taxes, so that money can be                                                              
used elsewhere  in the  project, thereby  making the project  more                                                              
viable.  It raises the rate of return from eight to 12 percent.                                                                 
                                                                                                                                
CHAIRMAN  WHITAKER  asked  what  the  ruling  means  to  the  port                                                              
authority in terms of dollars per year.                                                                                         
                                                                                                                                
MR.  WALKER said  he  would need  to  calculate  that, taking  the                                                              
annual net revenues  of the project and assuming  that without the                                                              
ruling, about  35 percent of the  total would go to  federal taxes                                                              
each year.                                                                                                                      
                                                                                                                                
CHAIRMAN WHITAKER said  his best estimate was an  annual effect on                                                              
the bottom  line of  $250 million  to three-fourths  of a  billion                                                              
dollars a year.  He added that those are huge numbers.                                                                          
                                                                                                                                
MR. GIBBS responded that, in his  experience, the financial market                                                              
takes a ruling like this at face value.                                                                                         
                                                                                                                                
CHAIRMAN   WHITAKER  wondered   why  the   IRS  ruling  does   not                                                              
specifically  state  that port  authority  earnings  would not  be                                                              
subject to income tax.                                                                                                          
                                                                                                                                
MR. GIBBS  said based on  recent discussions  he has had  with the                                                              
IRS,  the agency  did  not  want to  go  beyond a  decision  based                                                              
strictly on  the regulations.   Despite reluctance to  include the                                                              
specific  words  related to  tax  exemption,  those who  made  the                                                              
ruling have indicated that they understood  its effect would be to                                                              
exclude the  port authority from any  kind of federal taxes.   Mr.                                                              
Gibbs indicated  he had directed  attention to other  rulings that                                                              
include  specific reference  to income tax  exemption, words  that                                                              
the port  authority  would like see  included  in this ruling.  He                                                              
said  that   IRS  rulings  focus   on  procedural   and  technical                                                              
limitations, and the  branch with which he was dealing  was of the                                                              
impression  that procedurally  they  should not  go  further.   He                                                              
expressed hope  that the  IRS officials  involved will  agree that                                                              
there is no procedural reason why  they should not fully spell out                                                              
the ruling's effect on taxes.                                                                                                   
                                                                                                                                
MR. GIBBS, at  Chairman Whitaker's request, repeated  the question                                                              
asked of  the IRS and the  IRS conclusion that the  port authority                                                              
is a political subdivision.                                                                                                     
                                                                                                                                
CHAIRMAN WHITAKER  asked if the topic of tax-exempt  revenue bonds                                                              
would be a second issue.                                                                                                        
                                                                                                                                
MR.  GIBBS replied  that  the port  authority  plans  to submit  a                                                              
specific  request for  a ruling  regarding tax  exempt bonds  when                                                              
related  plans are  more fully  fleshed out.   He  added that  the                                                              
ruling that the port authority is  a governmental subdivision is a                                                              
good start in achieving financing  for the project, but that there                                                              
are  other rules  and  requirements that  will  have be  addressed                                                              
before there  can be  an answer to  the question regarding  bonds.                                                              
Mr.  Gibbs   clarified  for  Chairman   Whitaker  that   the  port                                                              
authority's  request had nothing  to do with tax exempt bonds, but                                                              
related only to income.                                                                                                         
                                                                                                                                
REPRESENTATIVE SMALLEY  asked if project plans were  predicated on                                                              
a specific market window.                                                                                                       
                                                                                                                                
MR.  WALKER said  the project  is  geared toward  the 2005  market                                                              
window.                                                                                                                         
                                                                                                                                
REPRESENTATIVE  SMALLEY  followed   by  asking  if  the  potential                                                              
revenues  of $450 million  to $3/4  billion are  predicated  on an                                                              
initial  seven tons  per year  or on  an expanded  14-20 tons  per                                                              
year.                                                                                                                           
                                                                                                                                
MR. WALKER replied  that those estimates were based  on 15 million                                                              
tons per year.                                                                                                                  
                                                                                                                                
REPRESENTATIVE  DYSON inquired if  a 12  percent discount  rate is                                                              
standard for calculating present worth.                                                                                         
                                                                                                                                
MR. WALKER said he did not know,  but would find out from the port                                                              
authority's financial  advisers.  Chairman Whitaker  recalled that                                                              
the  percentage  could  be   arbitrarily  fixed,  and  Mr.  Walker                                                              
confirmed that was the case.                                                                                                    
                                                                                                                                
REPRESENTATIVE   DYSON  wondered  if   12  percent  would   be  an                                                              
acceptable rate of return to investors in the project.                                                                          
                                                                                                                                
Number 2017                                                                                                                     
                                                                                                                                
MR. WALKER stated that on behalf  of the port authority, he cannot                                                              
over-emphasize  the  importance  of  the  IRS ruling.    The  port                                                              
authority concept is what makes this  project work, and the ruling                                                              
is a monumental step that has created  tremendous momentum for the                                                              
port authority.                                                                                                                 
                                                                                                                                
CHAIRMAN  WHITAKER asked  Mr.  Walker if  the  port authority  had                                                              
discussed  with  producers  or  with the  state  the  effect  this                                                              
definitive ruling has on a potential gas project.                                                                               
                                                                                                                                
MR.  WALKER  said  the port  authority  had  met  previously  with                                                              
producers and with  the state Administration.   The port authority                                                              
will give all of them a copy of the  ruling and discuss its impact                                                              
again  now that  the decision  has been  made.  In  response  to a                                                              
request  by  Chairman Whitaker,  Mr.  Walker  agreed to  keep  the                                                              
committee  apprised of  progress  and the  receptiveness of  those                                                              
parties.   In response  to a question  from Representative  Green,                                                              
Mr. Walker said  the concept of a port authority  being tax-exempt                                                              
is not unique, but there had not  been a previous inquiry in which                                                              
the facts were identical to this one.                                                                                           
                                                                                                                                
MR. GIBBS concurred.                                                                                                            
                                                                                                                                
CHAIRMAN  WHITAKER adjourned  the House  Special Committee  on Oil                                                              
and Gas at 11:47 a.m.                                                                                                           
                                                                                                                                
NOTE:   The meeting  was recorded and  handwritten log  notes were                                                              
taken.   A  copy of  the tape  and log  notes may  be obtained  by                                                              
contacting the House Records Office  at 129 6th Street, Suite 229,                                                              
Juneau, Alaska  99801-2197, (907)  465-2214, and after adjournment                                                              
of  the   second  session   of  the   Twenty-first  Alaska   State                                                              
Legislature  this information  may be obtained  by contacting  the                                                              
Legislative  Reference  Library  at  129 6th  Street,  Suite  102,                                                              
Juneau, Alaska 99801, (907) 465-3808.                                                                                           
                                                                                                                                
                                                                                                                                

Document Name Date/Time Subjects