Legislature(1993 - 1994)
04/12/1994 09:30 AM House STA
| Audio | Topic |
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE STATE AFFAIRS STANDING COMMITTEE
April 12, 1994
9:30 a.m.
MEMBERS PRESENT
Representative Al Vezey, Chairman
Representative Pete Kott, Vice-Chairman
Representative Bettye Davis
Representative Gary Davis
Representative Harley Olberg
Representative Jerry Sanders
MEMBERS ABSENT
Representative Fran Ulmer
COMMITTEE CALENDAR
HB 541: "An Act providing for an advisory vote of the
people concerning a preferred alternative for
increasing revenue available to support state
government; and providing for an effective
date."
MOVED OUT OF COMMITTEE WITH NO
RECOMMENDATIONS
HB 420: "An Act relating to limited liability
companies; amending Alaska Rules of Civil
Procedure 20 and 24; and providing for an
effective date."
MOVED FROM COMMITTEE AS CSSSHB 420(STA) WITH
NO RECOMMENDATIONS
WITNESS REGISTER
JAY HOGAN, Contract Worker
House Finance Committee
Alaska State Capitol, Room 502
Juneau, AK 99811-0460
Phone: 465-3878
POSITION STATEMENT: Addressed HB 541
REPRESENTATIVE GENE THERRIAULT
Alaska State Legislature
Alaska State Capitol, Room 421
Juneau, AK 99811-0460
Phone: 465-4947
POSITION STATEMENT: Prime sponsor of CSSSHB 420
LARRY MEYERS, Director
Income & Excise Audit Division
Department of Revenue
P.O. Box 110420
Juneau, AK 99811-0420
Phone: 465-2320
POSITION STATEMENT: Commented on CSSSHB 420
WILDA WHITTAKER, Staff
Representative Gene Therriault
Alaska State Capitol, Room 421
Juneau, AK 99811-0460
Phone: 465-4947
POSITION STATEMENT: Answered questions on CSSSHB 420
BRIAN DURRELL, Managing Partner
Bogle & Gates
1031 W. 4th Ave., Suite 600
Anchorage, AK 99501
Phone: 257-7828
POSITION STATEMENT: Answered questions on CSSSHB 420
BOB MANLEY
324 E. Cook Ave.
Anchorage, AK 99501
Phone: 263-8251
POSITION STATEMENT: Answered questions on CSSSHB 420
MARY NORDALE, Attorney
Robertson, Monagle & Eastaugh
P.O. Box 21211
Juneau, AK 99802
Phone: 586-3340
POSITION STATEMENT: Commented on CSSSHB 420
PREVIOUS ACTION
BILL: HB 541
SHORT TITLE: ADVISORY VOTE REGARDING STATE REVENUE
SPONSOR(S): FINANCE
JRN-DATE JRN-PG ACTION
03/23/94 2937 (H) READ THE FIRST TIME/REFERRAL(S)
03/23/94 2937 (H) STATE AFFAIRS
03/31/94 (H) STA AT 08:00 AM CAPITOL 102
03/31/94 (H) MINUTE(STA)
04/12/94 (H) STA AT 09:30 AM CAPITOL 102
BILL: HB 420
SHORT TITLE: LIMITED LIABILITY COMPANIES
SPONSOR(S): REPRESENTATIVE(S) THERRIAULT,Mulder,James
JRN-DATE JRN-PG ACTION
01/31/94 2206 (H) READ THE FIRST TIME/REFERRAL(S)
01/31/94 2206 (H) L&C, JUDICIARY, STATE AFFAIRS
02/24/94 2522 (H) SPONSOR SUBSTITUTE
INTRODUCED-REFERRALS
02/24/94 2522 (H) L&C, JUDICIARY, STATE AFFAIRS
03/08/94 (H) L&C AT 03:00 PM CAPITOL 17
03/09/94 2676 (H) L&C RPT 1DP 3NR
03/09/94 2676 (H) DP: MULDER
03/09/94 2676 (H) NR: WILLIAMS, SITTON, HUDSON
03/09/94 2676 (H) -ZERO FISCAL NOTE (DCED) 3/9/94
03/09/94 2703 (H) COSPONSOR(S): MULDER
03/18/94 (H) JUD AT 01:15 PM CAPITOL 120
03/21/94 (H) MINUTE(JUD)
03/23/94 (H) JUD AT 01:00 PM CAPITOL 120
03/30/94 (H) JUD AT 01:15 PM CAPITOL 120
03/31/94 3106 (H) COSPONSOR(S): JAMES
03/31/94 (H) STA AT 08:00 AM CAPITOL 102
03/31/94 (H) MINUTE(STA)
04/06/94 3153 (H) JUD RPT CSSS(JUD) NEW TITLE
4DP 1NR
04/06/94 3153 (H) DP: GREEN, JAMES, PORTER,
NORDLUND
04/06/94 3153 (H) NR: KOTT
04/06/94 3153 (H) -PREVIOUS ZERO FISCAL NOTE
(DCED) 3/9/94
04/07/94 (H) STA AT 08:00 AM CAPITOL 102
04/07/94 (H) MINUTE(STA)
04/12/94 (H) STA AT 09:30 AM CAPITOL 102
ACTION NARRATIVE
TAPE 94-46, SIDE A
Number 000
CHAIRMAN AL VEZEY called the meeting to order at 9:35 a.m.
Members present were REPRESENTATIVES G. DAVIS, B. DAVIS and
OLBERG. The meeting is on teleconference with Anchorage and
Fairbanks.
HB 541 - ADVISORY VOTE REGARDING STATE REVENUE
CHAIRMAN VEZEY opened HB 541 for discussion. He noted HB
541 had been heard once before.
Number 019
JAY HOGAN, CONTRACT WORKER, HOUSE FINANCE COMMITTEE,
addressed HB 541. He stated the House Finance Committee
sponsored HB 541 at the request of the majority membership.
HB 541 would put before the voters at the upcoming general
election, a preference question whether voters would prefer
as a revenue raising option, a state income tax, state sales
tax or some adjustment to permanent fund dividends.
MR. HOGAN focused on information in committee members'
packets that is headed "NEWS RELEASE." He stated this
report is the Department of Revenue's best range estimates
as to what the taxes or capping of dividends might produce.
The personal income tax is estimated at a production of
$250-$400 million a year. The sales tax is estimated at
$50-$100 million a year. The report gives gross receipts as
an option. Another page illustrates the effect of capping
the permanent fund dividend.
(REPRESENTATIVE KOTT joined the meeting at 9:37 a.m.)
CHAIRMAN VEZEY noted REPRESENTATIVE KOTT's arrival.
Number 073
REPRESENTATIVE OLBERG moved to pass HB 541 from committee
with individual recommendations.
Number 075
CHAIRMAN VEZEY asked the committee secretary to call the
roll.
IN FAVOR: REPRESENTATIVES VEZEY, B. DAVIS, G. DAVIS,
OLBERG.
OPPOSED: REPRESENTATIVE KOTT.
ABSENT: REPRESENTATIVES ULMER, SANDERS.
MOTION PASSED
CSSSHB 420: "An Act relating to limited liability
companies; and providing for an effective date."
CHAIRMAN VEZEY opened CSSSHB 420 for discussion. He noted
it was heard the previous Thursday.
Number 097
REPRESENTATIVE GENE THERRIAULT, sponsor, addressed CSSSHB
420. He noted REPRESENTATIVE ULMER had received information
that explained exactly what was happening on a national
level with limited liability companies (LLC). He explained
part of REPRESENTATIVE ULMER's concern regarded the
potential impact to the state's corporate receipts if LLC
legislation were to pass. He believed it would be minimal.
The business structures impacted would be those currently
filing under subchapter S status, or using the partnership
form. He did not believe very many corporations or C
corporations would be impacted, primarily because LLCs can
have no more than one of the following attributes: 1)
centralized management; 2) continuity of life; or 3) free
transferability of interest. Large publicly held
corporations, which pay the "lion share" of the corporate
tax in the state of Alaska, would want more than one of
those three attributes; therefore, would not be eligible for
LLC status.
REPRESENTATIVE THERRIAULT commented LLCs would be forming a
new business structure that would draw more from the
partnership and subchapter S status, which pay no corporate
tax in Alaska, than it would from larger corporations.
Number 160
LARRY MEYERS, DIRECTOR, INCOME & EXCISE AUDIT DIVISION,
DEPARTMENT OF REVENUE (DOR), commented on CSSSHB 420. He
addressed the question as to the impact on state revenues
with the formation of LLCs. The DOR has provided estimates
and their fiscal note is zero for operating costs. He
expressed DOR is not opposed to CSSSHB 420, however, they
have some concerns.
MR. MEYERS explained LLCs are a hybrid between a partnership
and a corporation. He noted the DOR projections are based
on what they anticipate on new filings of corporations, not
conversions of existing corporations. Over the last three
years, an average of 1,100 new corporations filed to do
business in the state of Alaska. He commented if 10 percent
of the new corporations were to elect LLC status, they
project to lose $5,500 on the first full year, up to
$11,000. He stated this would be the minimum.
MR. MEYERS addressed the DOR's concern that Alaska also
recognizes subchapter S corporations which are not subject
to tax. The flow through operations are usually taxed at
the individual level. Alaska does not, however, have an
individual income tax. They felt the state was slowly
losing revenue streams, for example, by adding LLCs. DOR
wanted people aware of this. He noted other states with
LLCs in place (approximately 40) have some type of tax
mechanism in place, either at the individual level or with
subchapter S corporations. Florida and Texas are similar to
Alaska; however, they have chosen to tax subchapter S
corporations and LLCs.
MR. MEYERS questioned the trade off for having LLCs. LLCs
are attractive, but are they so much that it is worth paying
a small share of taxes for them to be included as a
corporation by definition in Alaska statute.
Number 222
CHAIRMAN VEZEY questioned the point MR. MEYERS was just
trying to make.
Number 224
MR. MEYERS clarified if they are willing to have LLCs, would
the benefits of being classified as an LLC be valuable
enough to be subject to taxation, thereby included in the
definition of a corporation rather than a partnership.
Number 237
REPRESENTATIVE HARLEY OLBERG stated from his understanding,
if Alaska wanted to tax LLCs, they could define them as
corporations.
Number 243
MR. MEYERS affirmed REPRESENTATIVE OLBERG.
Number 247
CHAIRMAN VEZEY asked which statute sets up the corporate
tax.
Number 248
MR. MEYERS answered AS 43.20.000
(REPRESENTATIVE SANDERS arrived at the meeting at 9:48 a.m.)
Number 251
CHAIRMAN VEZEY looked up AS 43.20.000. He read AS
43.20.011. He clarified the change to the corporation
definition would be in AS 43.20.340, paren 2. He inquired
if this change would be better than adding LLCs to AS
43.20.011, noting the definition of LLCs would have to be
added.
MR. MEYERS replied DOR felt changing AS 43.20.340 would be
the easiest way.
Number 270
REPRESENTATIVE THERRIAULT commented he was concerned about
what the impact of classifying an LLC as a corporation for
the state of Alaska would be to the Internal Revenue Service
determination, whether there would be flow through
advantages at the federal level.
REPRESENTATIVE THERRIAULT believed the DOR estimate of the
potential impact was based on an average of how much each
corporate entity in the state of Alaska pays in taxes. He
assumed DOR took the gross receipts from the corporate
income tax divided by the number of corporations to equal
the potential amount of tax return from every corporation.
He noted this number forgets a large percentage of them are
organized under subchapter S which pay no taxes, and a large
number of them pay very small taxes. He stated there are a
few large corporate taxpayers in Alaska that skew their
figures. Therefore, the DOR estimation is an artificially
inflated number. He believed if LLCs were classified as
corporations, the consequence would be double taxation at
the federal level, as well as in Alaska.
(REPRESENTATIVE SANDERS left the meeting at 9:51 a.m.)
Number 306
REPRESENTATIVE OLBERG stated he would not recommend the
committee get into the tax aspect at this point. He
commented the committee should allow for the formation of
LLCs. He noted since nobody has been doing LLCs for more
than a year, no one would know what the consequences are.
He was sure if DOR found a problem they would approach the
legislature in the future.
Number 314
CHAIRMAN VEZEY stated his concern was, as a person engaged
in business, he wanted to see a level playing field. Why
extend the opportunity to use a corporate shield to limit
liability if they are not subject to the same tax structure
he is subject to. He noted 9.5 percent off a business's
bottom line is a significant number.
Number 327
REPRESENTATIVE THERRIAULT pointed out there were a lot of
technical changes incorporated into the Judiciary committee
substitute. He asked that the committee consider it.
CHAIRMAN VEZEY clarified the committee had before them a
blank committee substitute of CSSSHB 420, version R.
REPRESENTATIVE THERRIAULT explained that a summary of the
changes to the Judiciary committee substitute was in the
packets.
Number 358
CHAIRMAN VEZEY clarified version R, CSSSHB 420, included the
changes being proposed by REPRESENTATIVE THERRIAULT to
CSSSHB 420, version O.
REPRESENTATIVE THERRIAULT said yes.
Number 391
WILDA WHITTAKER, STAFF, REPRESENTATIVE THERRIAULT, clarified
they went into Judiciary with version K, changes in
Judiciary resulted in version O, proposed changes by
REPRESENTATIVE THERRIAULT to the Judiciary CS resulted in
version R.
CHAIRMAN VEZEY moved to the Anchorage teleconference site.
Number 411
BRIAN DURRELL, MANAGING PARTNER, BOGLE & GATES, testified
via teleconference from Anchorage, on CSSSHB 420. He
directed to the DOR fiscal note. He felt the fiscal note
drastically overstated any potential negative revenue impact
and fails to account for the positive revenue aspects of
CSSSHB 420.
MR. DURRELL stated the positive aspects a detailed fiscal
note might include. Registration and filing fees will
generate revenue; however, in the Department of Commerce.
Out-of-state business will be attracted. There would be an
elimination of any carryover or net operating losses from C
corporations or S corporations that may choose to convert to
LLC status. There will be general stimulation from new
business formation and activity. Most importantly, if any
corporations choose to convert to LLC status, they would
liquidate; thereby triggering all of the unrealized gains in
those corporations and producing significant revenue in the
form of taxes. He understood these factors would be
difficult to calculate in revenue impact, however, they
would all be positive.
MR. DURRELL criticized the DOR fiscal note. He questioned
the 1,100 new corporations being the basis upon which the
revenue loss is calculated. He stated only about 28 percent
of the Alaskan corporations presently in Alaska filed tax
returns that reflected tax liability. The DOR fiscal note
is based upon 100 percent. He questioned the average tax
liability used as an assumption in the DOR fiscal note. The
large publicly held corporations, which cannot practically
organize as LLCs, skew the figure significantly. An average
tax liability selected should be on the bottom end of the
assumption. He believed 60 percent of the corporations who
pay taxes, pay $500 or less. These corporations are the
focus. He questioned the percentage of corporations that
might organize as LLCs. DOR states between 10 and 50
percent of corporations might choose to organize as LLCs.
He emphasized most organized C corporations, even if LLC
legislation were passed, would continue to organize as C
corporations. He stated businesses most likely to choose
LLC status are those who would have otherwise selected
partnerships or S corporate status.
MR. DURRELL referred to Florida and Texas that have treated
LLCs as corporations and taxed them. He emphasized these
states are very different from Alaska because they also have
an income tax on S corporations. Alaska does not. He
stated if Alaska were to tax LLCs, no one will use the
structure and an uneven playing field will be created,
referring to the difference there would be between LLCs and
S corporations. S corporations flow through to the
shareholders and would not have taxes applied to them.
REPRESENTATIVE OLBERG asked MR. DURRELL to address CHAIRMAN
VEZEY's concern that an LLC, not subject to corporate tax in
a state with no income tax, would have an unfair advantage
in competing with a regular corporation.
Number 518
MR. DURRELL answered 3,000 pay C corporations pay corporate
income tax. The policy decision was that S corporations do
not have to pay a tax. He noted S corporations surpass C
corporations in filing returns. LLCs are more akin to S
corporations; for federal purposes there is a flow through
of profits and losses to the members of an LLC, likewise S
corporations have a flow through to the shareholders. He
felt it was important to keep the two entities on an even
level in terms of taxation. If a tax on LLCs was
considered, an S corporation tax would be necessary to keep
the playing field level. He pointed out the reason Florida
and Texas imposed a tax on LLCs was because they have a tax
on S corporations.
Number 541
REPRESENTATIVE THERRIAULT commented he believed the DOR
estimate was also based on a cumulative function. They
begin in 1995 and compound the corporations they believe
would have been formed over the years, but now elect the LLC
status. The "snowballing effect" of this estimate discounts
the fact that most business start-ups do not make it over
the long haul. He felt there would not be an accumulation.
He stated if there was an impact, it would reach a threshold
after a few years when businesses begin to close down
because they have not proven themselves to be economically
viable.
Number 556
CHAIRMAN VEZEY said he was not very familiar with people
operating under S corporation status. He did not believe it
was an attractive status, therefore not often used. He
assumed LLC status would be attractive because of the
limited liability or corporate shield.
Number 567
MR. DURRELL responded S corporations provide the same
liability limitations as C corporations; however, they offer
a pass through of profits and losses to the shareholders
without taxation by the state of Alaska. He stated S
corporations are attractive to closely held businesses that
would like to form as a corporation.
Number 579
CHAIRMAN VEZEY stated he was most familiar with the
construction and mining industry. He commented he was not
trying to say there were not S corporations in those
industries, but he was not aware of any.
Number 583
MR. DURRELL stated forming as an S corporation depends upon
a whole host of factors the organizers of the corporation
would consider. From his practice, well over half the
corporations he deals with elect S status to provide, at the
federal tax level, a flow through of the income to the
shareholders. They report it on their personal returns. He
compared this with the C status, whereby a double tax is in
place taxing the corporate and shareholder level. He noted
the corporate income tax rate highest marginal rate, is
significantly lower than the highest individual rate. For
this reason, some businesses may still elect C status.
Number 599
CHAIRMAN VEZEY speculated there were no S corporations in
the construction industry because it is very dependent upon
financial responsibility.
Number 606
MR. DURRELL agreed. He stated LLCs would be held by
publicly held or large corporations in the mining industry,
in lieu of joint ventures.
Number 610
CHAIRMAN VEZEY agreed. He questioned how joint ventures
were treated tax wise. He had thought they did not normally
pay taxes because they pass them through to the partners or
corporations.
Number 617
MR. DURRELL said correct, and an LLC would work exactly the
same for those organizations in a joint venture. The
advantage of using an LLC over a corporate venture would be
that they would not need to form a wholly-owned subsidiary
to serve as a joint venture partner. The corporation could
enter into the LLC as a member.
Number 623
CHAIRMAN VEZEY noted a C corporation has to be financially
viable and well capitalized, depending on the type of work
it does. He questioned if an LLC would cumulate retained
earnings, thereby avoiding the state of Alaska corporate
structure. Paying taxes is the cost of accumulating
capital.
MR. DURRELL answered now all of the profits and losses would
be allocated to the partner and at the federal level, they
would pay taxes. The accounting would be much like a
partnership, consequently the LLC would not gain retained
earnings as a corporation would.
MR. DURRELL noted the Judiciary subcommittee addressed the
question of LLC entity solvency. How would third parties
dealing with an LLC be protected. How could it be assured
that the LLC will have the solvency needed to meet its
obligations. Distribution formulas were worked on to assure
that no funds could come out of the LLC, minimizing the risk
creditors being left "holding the bag."
Number 650
CHAIRMAN VEZEY clarified the LLCs would have to retain
capital to meet their liabilities.
MR. DURRELL agreed.
Number 653
CHAIRMAN VEZEY inquired about retaining capital to improve
the LLCs financial responsibility status. He mentioned, for
example, an LLC's ability to acquire surety bonds in its own
name.
Number 658
MR. DURRELL responded LLCs would have the power to obtain
surety bonds; however, it would be up to the bonding
company. He believed the bonding may ask for personal
guarantees from the primary equity holders in the LLC.
Number 663
REPRESENTATIVE THERRIAULT mentioned the Alaska Bankers
Association's (ABA) concerns were dealt with in the
Judiciary committee. The questioned if LLCs would put
lending institutions and suppliers at a greater risk. He
noted the Judiciary committee substitute, ABA's suggested
language and further modifications were incorporated into
CSSSHB 420, version R. He stated the lending organizations
would want personal guarantees from LLCs.
Number 675
MR. DURRELL referred to Article 9, beginning with AS
10.50.290 and specifically AS 10.50.305, restrictions on
distribution.
Number 678
CHAIRMAN VEZEY continued to question if an LLC would
cumulate retained earnings or build a working capital base
of its own.
Number 681
BOB MANLEY, testified via teleconference from Anchorage. He
addressed questions on CSSSHB 420. He said CSSSHB 420 is a
flexible LLC statute. When an LLC is formed, it may elect
to be taxed as a partnership, basically the same as an S
corporation. As an alternative, the LLC can assume
additional corporate characteristics and be taxed as a
corporation. He noted retained earnings are basically a C
corporation concept. It is expensive to retain earnings in
an S corporation because, regardless if the money is taken
out, the shareholder still pays taxes on the earnings. He
felt this is why corporations who want to retain earnings
take advantage of the lower federal corporate income tax on
corporations and suffer the double taxation.
TAPE 94-46, SIDE B
Number 000
MR. MANLEY continued...
MR. MANLEY stated LLCs would be used as replacements for S
corporations or partnerships. Some people will elect LLC
status for the flexible operating system over C corporation
status; however, those businesses will still treat the LLC
as a C corporation for tax purposes.
Number 017
CHAIRMAN VEZEY commented that reassured his concerns. He
questioned how the switch would be made between the two
different ways to treat an LLC.
Number 021
MR. MANLEY responded the complication is imposed strictly by
the federal income tax code. Determining whether an entity
is a partnership or a corporation for tax purposes is
variable for the IRS. For example, an entity could be a
trust for state law purposes, but the IRS may still decide
it is a corporation for tax purposes.
MR. MANLEY stated the IRS has four characteristics to
identify corporations: 1) limited liability; 2) centralized
management; 3) free transferability of interests, or 4)
continuity of life. If the organization has two or less of
these characteristics, it would be a partnership for tax
purposes. If the organization has more than two, it is
taxed as a corporation. Therefore, when forming an LLC, the
organization already having limited liability, would have to
decide which two of the other characteristics it wanted.
Electing two additional characteristics would make the LLC
be taxed as a C corporation.
Number 069
CHAIRMAN VEZEY called for a recess at 10:28 a.m. The
meeting was reconvened at 10:35 a.m. Members present were
REPRESENTATIVES G. DAVIS, OLBERG, B. DAVIS and SANDERS.
CHAIRMAN VEZEY stated MR. MANLEY had been commenting on the
guidelines used by the IRS to establish the applicable tax
structure. He felt MR. MANLEY had not said anything that
really applied the state of Alaska's corporate tax
structure.
Number 081
MR. MANLEY agreed. He replied, it was his understanding
that the state of Alaska simply adopts the classification
established under the federal rules and guidelines. He was
sure DOR could make its own independent statutable
determination because the rules are exactly the same. He
noted this is how entities taxation structures are
determined. Likewise, Alaska adopts the same S
classification system, whereby under certain circumstances
an entity can elect to have itself taxed similarly to a
partnership, avoiding the double taxation.
MR. MANLEY emphasized S corporations are not taxed in
Alaska. He referred to Mr. Meyers' testimony and stated he
was pointing out a new source of revenue. The critical
point is, if S corporations are going to be taxed, LLCs also
need to be. He stated taxing LLCs and not S corporations
would be unreasonable because no one would organize an LLC.
CSSSHB 420 would never be used and no extra tax revenue
would be generated.
Number 120
CHAIRMAN VEZEY clarified Alaska follows federal guidelines
to determine whether an entity is subject to corporate tax.
MR. MANLEY agreed.
Number 130
MR. DURRELL pointed out there is an incorporation by
reference statute in Title 43.
Number 134
MR. MEYERS joined the table again. He stated the testimony
had been correct, whereby they would adopt by reference, the
internal revenue code. He clarified each state that has
passed LLC legislation has sought a ruling by the IRS of
what the tax status would be for federal purposes. He noted
most states have followed the IRS decision, and Alaska would
follow suit.
(REPRESENTATIVE KOTT rejoined the meeting at 10:39 a.m.)
Number 149
CHAIRMAN VEZEY stated Alaska statutes set up a corporate tax
structure that defines a corporation as "an association, a
joint stock company, or an insurance company." He
questioned the meaning of this definition. He felt it meant
a corporation could be anything a person wanted it to be.
He inquired how DOR presently determines who to assess a
corporate tax to and if they are notified of their potential
liability.
Number 168
MR. MEYERS answered the DOR corporate tax structure is based
on the entity first registering as a corporation. The
corporation then elects an option. For example, subchapter
S corporation. From information received from Department of
Commerce, DOR expects to see a corporate return. DOR can
only track through the Department of Commerce. DOR includes
other areas where it expects to see a return file. The
process will be similar with LLCs. They do sometimes track
through the IRS.
Number 195
CHAIRMAN VEZEY asked how the DOR finds out if the entity is
filing a federal corporate return.
MR. MEYERS answered the DOR has an exchange of information
agreement with the IRS. IRS records are correlated with DOR
records.
Number 202
CHAIRMAN VEZEY recognized CSSSHB 420 as a complex issue. He
asked what happens if an entity forms as an LLC and selects
two and one-half, or three of the four characteristics.
Would they still be an LLC, but treated as a corporation for
tax purposes.
MR. MANLEY answered correct. He directed to CHAIRMAN
VEZEY's question about associations. He explained
association is a term of art, therewith it is basically
taxed as a corporation. The Kintner regulations set the
long characteristics and definitions at treasury ranks
301.7701-1, 2 and 3.
Number 240
MARY NORDALE, ATTORNEY, commented on CSSSHB 420. She stated
from 1984-1986, she had been Commissioner of Revenue. On
many occasions she had been required to sign fiscal notes
dealing with subject matter, which was a matter of
conjecture. She commented on MR. DURRELL's and MR. MANLEY's
comments, with respect to the estimates contained in the
fiscal note, were accurate. DOR is always criticized for
underestimation and if they overestimate, they stimulate
additional questions and considerations. She felt DOR
significantly overestimated the impact.
MS. NORDALE expressed CSSSHB 420 is another mechanism for
capital formation. She stated CHAIRMAN VEZEY dealt with the
problem of capital formation through the pure corporate
form, with regard to retained earnings. An LLC, partnership
and S corporation are all other methods. She felt Alaska
needed the capital formation LLC status would offer. LLCs
would have significant impact on the development of
infrastructure for residential and other commercial
developments. LLCs would induce the mining industry and
other joint venture entities into feeling more secure about
investing within the state.
MS. NORDALE pointed out, even though there may insignificant
loss in corporate tax revenue, there will be a growth in
business which will offset the loss. She urged the
committee to pass CSSSHB 420.
Number 290
CHAIRMAN VEZEY, hearing no further questions, asked the
pleasure of the committee. He recognized version R of
CSSSHB 420, must be adopted.
Number 295
REPRESENTATIVE OLBERG so moved.
Number 304
CHAIRMAN VEZEY asked the committee secretary to call the
roll.
IN FAVOR: REPRESENTATIVES VEZEY, KOTT, B. DAVIS, G.
DAVIS, OLBERG.
ABSENT: REPRESENTATIVES ULMER, SANDERS.
MOTION PASSED
REPRESENTATIVE OLBERG moved to pass CSSSHB 420, version R,
from committee with individual recommendations.
Number 310
CHAIRMAN VEZEY asked the committee secretary to call the
roll.
IN FAVOR: REPRESENTATIVES VEZEY, KOTT, B. DAVIS, G.
DAVIS, OLBERG.
ABSENT: REPRESENTATIVES ULMER, SANDERS.
MOTION PASSED
ADJOURNMENT
CHAIRMAN VEZEY, having no more business before the
committee, adjourned the meeting at 10:50 a.m.
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