HOUSE SPECIAL COMMITTEE ON FISHERIES February 24, 1997 5:00 p.m. MEMBERS PRESENT Representative Alan Austerman, Chairman Representative Scott Ogan Representative Mark Hodgins Representative Gene Kubina MEMBERS ABSENT Representative Ivan Ivan COMMITTEE CALENDAR PRESENTATION: Commercial Fisheries Entry Commission regarding recent IRS seizures. *HOUSE JOINT RESOLUTION NO. 23 Relating to the seizure and sale of Alaska commercial fishing entry permits by the United States Internal Revenue Service. - MOVED HJR 23 OUT OF COMMITTEE *HOUSE BILL NO. 123 "An Act relating to the repeal of the termination date of the Federal Tax Obligation Loan Program under the Commercial Fishing Loan Act; and providing for an effective date." - MOVED HB 123 OUT OF COMMITTEE (* First public hearing) PREVIOUS ACTION BILL: HJR 23 SHORT TITLE: SALE OF LTD ENTRY PERMITS BY IRS SPONSOR(S): REPRESENTATIVE(S) HUDSON, Grussendorf, Ivan JRN-DATE JRN-PG ACTION 02/17/97 373 (H) READ THE FIRST TIME - REFERRAL(S) 02/17/97 373 (H) FSH, RESOURCES 02/18/97 388 (H) COSPONSOR(S): IVAN 02/24/97 (H) FSH AT 5:00 PM CAPITOL 124 BILL: HB 123 SHORT TITLE: TAX OBLIGATION LOAN PROGRAM SPONSOR(S): REPRESENTATIVE(S) IVAN, Hudson JRN-DATE JRN-PG ACTION 02/10/97 294 (H) READ THE FIRST TIME - REFERRAL(S) 02/10/97 294 (H) FISHERIES, RESOURCES 02/24/97 (H) FSH AT 5:00 PM CAPITOL 124 02/24/97 455 (H) COSPONSOR(S): HUDSON WITNESS REGISTER BRUCE TWOMLEY, Chairman Commercial Fisheries Entry Commission Department of Fish and Game 8800 Glacier Highway Juneau, Alaska 99801 Telephone: (907) 789-6160 POSITION STATEMENT: Commercial Fisheries Entry Commission Presentation. REPRESENTATIVE BILL HUDSON Alaska State Legislature Capitol Building, 108 Juneau, Alaska 99801 Telephone: (907) 465-3744 POSITION STATEMENT: Presented HJR 23. JERRY MCCUNE, President United Fishermen of Alaska 211 Fourth Street, Suite 112 Juneau, Alaska 99801 Telephone: (907) 586-2820 POSITION STATEMENT: Testified in support of HJR 23. BERNICE HEYANO Bristol Bay Economic Development Corporation Permit Brokerage P.O. Box 964 Dillingham, Alaska 99576 Telephone: (907) 842-1994 POSITION STATEMENT: Testified on HJR 23. JERRY LIBOFF, manager Native Village Corporation P.O. Box 646 Dillingham, Alaska 99576 Telephone: (907) 842-22512 POSITION STATEMENT: Testified in support of HJR 23 and HB 123. HJALMAR OLSON, fisherman P.O. Box 456 Dillingham, Alaska 99576 Telephone: (907) 842-5532 POSITION STATEMENT: Testified in support of HJR 23 and HB 123. CHERI SHAW, Executive Director Cordova District Fishermen United P.O. Box 939 Cordova, Alaska 99574 Telephone: (907) 424-3447 POSITION STATEMENT: Testified in support of HJR 23 and HB 123. JEFF STEPHENS United Fishermen Marketing Association 103 Marine Way Kodiak, Alaska 99615 Telephone: (907) 486-3453 POSITION STATEMENT: Testified in support of HJR 23 and HB 123. MELANIE GUNDERSEN Peninsular Marketing Association P.O. Box 248 Sand Point, Alaska 99661 Telephone: (907) 383-3600 POSITION STATEMENT: Testified in support of HJR 23 and HB 123. TOM WRIGHT, Legislative Assistant to Representative Ivan Ivan Alaska State Legislature Capitol Building, Room 418 Juneau, Alaska 99801 Telephone: (907) 465-3882 POSITION STATEMENT: Presented HB 123. GREG WINEGAR, Juneau Lending Branch Manager Division of Investments Department of Commerce and Economic Development P.O. Box 34159 Juneau, Alaska 99803 Telephone: (907) 465-2510 POSITION STATEMENT: Testified on HB 123. ACTION NARRATIVE TAPE 97-6, SIDE A Number 001 CHAIRMAN ALAN AUSTERMAN called the House Special Committee on Fisheries meeting to order at 5:00 p.m. Members present at the call to order were Representatives Austerman, Ogan and Hodgins. Representative Kubina arrived at 5:03 p.m. Representative Ivan was absent. Number 017 CHAIRMAN AUSTERMAN announced the first order of business would be a presentation by the Commercial Fisheries Entry Commission (CFEC) regarding recent IRS seizures. Number 089 BRUCE TWOMLEY, Chairman, Commercial Fisheries Entry Commission, Department of Fish and Game, stated that the committee had asked for an overview of the problems that the commission has faced with the IRS and their efforts to seize and force the sale of limited entry permits. He stated that limited entry permits were created by the legislature as a privilege with the intent to be revocable or changeable by the state and the legislature. He stated that permits were originally awarded based on need. He stated that permits were made transferrable by the legislature in order to empower fishermen and their families. Fishermen and their families would be able to maintain their traditional access to the fisheries they most depended upon. He stated that this has happened in the rural areas. He stated that 78 percent of limited entry permits are held by Alaskans and more than half of those are held by rural Alaskans. He stated that the limited entry system is working, for the most part, the way the legislature intended it to. It secures access to the fisheries by Alaskans and preserves the state's ability to manage fisheries for the benefit of the fishermen. He stated that it gives fishermen a long term stake in the fishery which provides an incentive for them to observe conservation laws. He stated that it was intended that third parties could not come along and take the privileges away. He stated that in 1992 the legislature affirmed the commission's ability to say no to third parties who attempted to take the privilege away from the fishermen. Number 378 MR. TWOMLEY stated that the IRS has taken a different view, since 1981 the IRS has made efforts to seize and force the sale of limited entry permits. He stated that as a result only three cases came to the commission for a decision. Number 460 CHAIRMAN AUSTERMAN asked if this has been occurring for a ten year period of time. Number 469 MR. TWOMLEY replied that was correct for at least the last decade. Number 474 CHAIRMAN AUSTERMAN asked what year was it when the IRS actually seized its first permit. Number 483 MR. TWOMLEY replied that it was in 1981. Number 496 MR. TWOMLEY stated that in two of the three cases the buyers of the sale were not eligible to receive entry permits and were denied the sale. He stated that the third case was not approved because the transfer was flawed. He stated that the IRS has not challenged the decision. The state has made an effort to cooperate with the IRS. The IRS realized it was having a difficult time collecting taxes from fishermen and the IRS asked the state for help. Through 1993 the state requested from the IRS statistics to see how extensive the problem was. He stated that the statistics showed that the bulk of the people owed well under $30,000. He stated that the legislature established the Tax Obligation Loan Program as a result of the statistics. He stated that after 1988 things began to go downhill as world markets affected the price of our salmon. He stated that up until 1988 there were a number of fishermen who planned on paying their taxes with the bonuses that came from their fisheries after the first of the year. He stated that others planned to pay this year's taxes with next year's earnings and would get extensions to make that possible. In 1998 when the bottom fell out from underneath salmon some individuals fell into a trap that they had a hard time getting out of. He stated that there are people in the state coming into the tax system for the first time, 40 percent of the filings were rejected and turned back because of having no record of the individuals involved. Many of these people came from isolated fishing communities where commercial fishing is the primary if not the only source of cash income to those communities. He stated that these individuals fall under the category of non-filers and when they do file it often turns out that they owe little or no money to the IRS. He stated that having recognized this problem the state and the IRS are creating programs to help these individuals, some of the community development quota organizations have financed help for individual tax payers. Number 1100 MR. TWOMLEY stated that in 1992 the commission was served with a summons from the IRS with the 2,000 people who had not filed taxes in 1992. He stated that in 1993 and 1994 the total who had not filed was 684. He stated that the cooperative efforts with the IRS has turned this problem around. He stated that it came as a shock to the commission when the IRS gave the state two days of notice and put two limited entry permits on the block. He stated that the permits had a market value of $30,000 and the IRS was prepared to sell them for as little as $3,375. He stated that they wondered why the IRS was doing this and why there was not a more serious attempt to raise revenue. People were told that the sale is between the IRS and the state, the price is reduced because the IRS would like the individual to sue the state but in any event the IRS is prepared to pursue this issue to a resolution satisfactory to the IRS. He stated that the sale was approved by the highest levels of the IRS both in Seattle and in D.C. He stated that a member of the public was told by an IRS revenue officer that if one permit was approved it would open the flood gates on permit seizures and transfers. He stated that there is a clear dichotomy happening within the IRS. He stated that the cooperative measures have produced $4.5 million in revenues to the IRS that they wouldn't have been able to collect otherwise. He stated that there is an effort within the IRS to undermine and disadvantage the state. He stated that unfortunately Alaska has made commercial fishermen an easy target for the IRS, due to the close track that is kept on everything the commercial fisherman makes and what it is worth. Number 1316 CHAIRMAN AUSTERMAN asked what communication has he had with the IRS since the sales took place and does he feel that same attitude is present. Number 1335 MR. TWOMLEY replied that they had a meeting last week in Anchorage and the response was mixed. He stated that he expressed, to the IRS, the importance of completing the cooperative projects and that it is in no one's interest to undermine these projects as was done with the pre-Christmas sales. He stated that the meeting ended without an agreement on that point. Number 1424 CHAIRMAN AUSTERMAN asked what could we as legislators do. Number 1430 MR. TWOMLEY replied that the HJR 23 would be an important step to be taken by the legislature and HB 123 would be a helpful provision. Number 1458 REPRESENTATIVE MARK HODGINS asked if there was a record of how many of the loans actually get paid back. Number 1475 MR. TWOMLEY replied that he believed the state has that and it will be addressed as HJR 23 is presented. HJR 23 - SALE OF LTD ENTRY PERMITS BY IRS Number 1480 CHAIRMAN AUSTERMAN announced the next order of business would be HJR 23, "Relating to the seizure and sale of Alaska commercial fishing entry permits by the United States Internal Revenue Service." REPRESENTATIVE BILL HUDSON stated that he introduced HJR 23 after talking to members of the CFEC and others in the fishing industry. He stated that HJR 23 requests that the Alaska Congressional Delegation use any means available to assure that the IRS will collect past dues from income generated from the sale of fish and voluntary sale of limited entry permits. He stated that HJR 23 is to ensure that the IRS complies with Federal Law to avoid inflicting economic hardship on the tax payers and to protect fishing privileges and the right of Alaska fishermen to work. HJR 23 compliments Governor Knowles effort of appeal to the congressional delegation to bring the pertinent members of the IRS to work together with us. He stated that the CFEC had good cooperation with some members of the IRS and now without the cooperation it seems that economic harm could be the result to the permit regime. He stated that the state of Alaska has established the limited entry permits as a means to manage the fisheries from over-harvesting and over-entry. He stated that for the IRS to sell a permit worth $30,000 for $5,000, with threats to seize an additional seven entry permits in the Dillingham area, is not right. He stated that it does appear that the IRS' actions are calculated. He stated that he has no intention to relieve any taxpayer of the taxes that they owe. He stated that he would urge the committee to adopt HJR 23 so Congress could take some action. Number 1726 REPRESENTATIVE SCOTT OGAN stated that he agreed that people should not have their livelihood taken away and it violates the spirit of the U.S. Constitution. He stated that he would support HJR 23. Number 1763 JERRY MCCUNE, President, United Fishermen of Alaska, stated that United Fishermen of Alaska support HJR 23, to keep the permit system intact. He stated that the IRS wants to get a permit so they can go after other permits. He stated that they will end up selling a $150,000 permit for a $10,000 tax obligation. He stated that every fishermen he has talked to across the state supports HJR 23. Number 1816 BERNICE HEYANO, Bristol Bay Economic Development Corporation Permit Brokerage, testified via teleconference from Dillingham, that this is not a program that hands out money to individuals who owe back taxes, it is a loan program where individuals have to have a permit in order to get the loan. She stated that rural individuals are not able to get commercial loans to pay their back taxes because they lack collateral. She stated that the loan program has benefitted Bristol Bay in numerous ways by helping people if they can't pay their taxes. JERRY LIBOFF, manager, Native Village Corporation, testified via teleconference from Dillingham, that he is a tax practitioner and a commercial fisherman. He stated that he is in favor of HJR 23 and HB 123. Both of these will be positive tools toward getting the IRS problems worked out so the permits will remain in the villages. He stated that he has helped 100 people in Bristol Bay to save their permits from loss and helped 10 people obtain the tax obligation loan funds to get the IRS off their back. Number 1963 HJALMAR OLSON, fisherman, testified via teleconference from Dillingham, in support of HJR 23 and HB 123. Number 2000 CHERI SHAW, Executive Director, Cordova District Fishermen United, testified via teleconference from Cordova, in support of HJR 23 and HB 123. She stated that since the Tax Obligation Loan Program came into being it has been successful in enabling commercial fishermen to pay tax obligations. She stated that extending this program could only benefit the state and the commercial fishing industry. She stated that the CFEC will be able to continue in their efforts to bring commercial fishermen in compliance with their federal tax obligation. She stated her husband was a recipient of the Federal Tax Obligation Loan Program and has been a fishermen representative at the Alaska Symposium with the IRS. She stated that she was appalled that the IRS had tried to seize and sell two permits prior to the Christmas holiday. She stated that the symposium discussed the effort to avoid such drastic measures and to allow the CFEC to intervene to try and rectify the problem by suggesting solutions. She stated that it was reprehensible that the IRS could turn its back on the agreements that were made. Number 2112 JEFF STEPHENS, United Fishermen Marketing Association, testified via teleconference from Kodiak, in support of HJR 23 and HB 123. He stated that it is important to reaffirm Alaska's intention to work with the IRS in a positive manner to help collect past taxes while at the same time allowing commercial harvesters to continue their commercial endeavors so they can continue in the commercial enterprize. Number 2207 MELANIE GUNDERSEN, Peninsular Marketing Association, testified via teleconference from Sand Point, in support of HJR 23 and HB 123. She stated that it would be good if Halibut Individual Fish Quotas (IFQ) could be protected from seizure from the IRS. Number 2250 REPRESENTATIVE GENE KUBINA made a motion to move HJR 23, with individual recommendations and zero fiscal notes. Number 2259 CHAIRMAN AUSTERMAN asked if there was an objection, hearing none HJR 23 was moved out of the House Special Committee on Fisheries. HB 123 - TAX OBLIGATION LOAN PROGRAM Number 2263 CHAIRMAN AUSTERMAN announced the next order of business to be HB 123, "An Act relating to the repeal of the termination date of the Federal Tax Obligation Loan Program under the Commercial Fishing Loan Act; and providing for an effective date" and stated that Tom Wright will present the bill to the committee. Number 2272 TOM WRIGHT, Legislative Assistant to Representative Ivan Ivan, stated that Representative Ivan sent a letter to Senator Stevens, Senator Markowski and Representative Young, in December after the sale of the permit by the IRS, to protest the action. He stated that HB 123 repeals Sections 2, 9, 10 of SB 251. He stated that it repeals the termination date of the Tax Obligation Loan Program. Number 2386 REPRESENTATIVE OGAN asked it there were representatives from the Division of Investments and if they could come forward. Number 2394 GREG WINEGAR, Juneau Lending Branch Manager, Division of Investments, Department of Commerce and Economic Development, stated that the division administers the Tax Obligation Loan Program as a part of the commercial fishing revolving loan fund. He stated that the program came into existence because there were a lot of commercial fishermen having difficulties with the IRS. He stated that the program has helped 220 individuals get squared away with the IRS and resulted in $4.7 million being collected. He stated that there continues to be a need for the program although to a lesser extent. He stated that about one-third of the loans are delinquent at this time however, most of them have an extension and are secured loans. He stated that it is a revolving fund that loans out the money and the fund has not recently received any general fund money. He stated that there is a zero fiscal note. TAPE 97-6, SIDE B Number 010 REPRESENTATIVE OGAN asked what the ratio of collateral is. Number 022 MR. WINEGAR replied that it varies depending on the tax bill and the amount that is borrowed but in no case would it exceed 90 percent, so there is always a 10 percent cushion and in many cases it is much greater than that. Number 028 REPRESENTATIVE OGAN asked it he could clarify that, 90 percent of what to get a 10 percent cushion. Number 041 MR. WINEGAR replied if you had a $10,000 permit the most that we would be able to loan by law would be $9,000, so there would be a ten percent cushion. Number 044 REPRESENTATIVE OGAN stated that you are basically loaning by the value of the permit. He asked if the permits are holding their value. Number 056 MR. WINEGAR stated that most of them are holding their value while some of them are declining, but in many cases the amount of the taxes owed is far less then the value of the permit. Number 067 REPRESENTATIVE OGAN stated that 10 percent does not seem to be much of a cushion and wondered if this would undermine the value of the revolving fund. Number 090 MR. WINEGAR responded that in most of the cases there is plenty of collateral. Number 108 REPRESENTATIVE MARK HODGINS asked what the loan portfolio size is. Number 118 MR. WINEGAR responded that right now the total portfolio is about $75 million. He stated that through the life of the program they have loaned out about $300 million. Number 125 REPRESENTATIVE HODGINS asked if there was interest income that helps to turn money for that fund. Number 138 MR. WINEGAR stated that it is completely revolving and has been since 1985, so all of the funds that have been used to cover the program and to make loans have come out of those repayments to the fund. Number 143 REPRESENTATIVE HODGINS asked if they would take a fishing permit if a loan was not paid back. Number 152 MR. WINEGAR responded that it could happen through this program, however, it is a very last resort. He stated that there is a lot of latitude to work with individuals. Number 168 REPRESENTATIVE HODGINS stated that it seems that we would be transferring ownership, instead of the IRS getting the permits the state would be getting the permits. Number 173 MR. WINEGAR stated that there could be that situation but the division has a much different interest in how the program is run. Number 177 CHAIRMAN AUSTERMAN stated that the division has not had a default because they have always been able to work it out. He stated that if there is a default he would rather it be the state of Alaska that winds up with the permit rather than the IRS. Number 188 REPRESENTATIVE KUBINA stated that he would like to echo that. He stated that it is a program that is paying for itself, it has a zero fiscal note and the division would not loan money if they were going to lose it. He stated that he was astounded with the way the IRS has worked with the state and with the people. Number 227 REPRESENTATIVE KUBINA made a motion to move HB 123, with individual recommendations and zero fiscal notes. Number 230 CHAIRMAN AUSTERMAN asked if there was an objection. Number 234 REPRESENTATIVE OGAN stated that he did not have an objection but he wanted to state that he is worried that we are further enabling people to not take care to pay their taxes because the state will help them out. Number 264 REPRESENTATIVE HODGINS stated that there are a lot of people in the rural areas that do not realize there is an IRS so we need to help these people by continuing on with the program. Number 305 CHAIRMAN AUSTERMAN stated that this program has been around for quite some time and we are not trying to create something new and the default rate is not high. Number 330 REPRESENTATIVE OGAN stated that there could be a high default rate but since they have deferred loans they are not calling defaults. Number 348 CHAIRMAN AUSTERMAN asked if there was an objection. Hearing none HB 123 was moved out of the House Special Committee on Fisheries. ADJOURNMENT Number 359 CHAIRMAN AUSTERMAN adjourned the House Special Committee on Fisheries at 5:56 p.m.