Legislature(1993 - 1994)
03/22/1994 01:37 PM Senate L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATOR KELLY introduced SB 185 (LIMITATIONS PERIOD FOR TAX ASSESSMENTS) introduced by SENATORS TAYLOR and KERTTULA by request, and invited former attorney general, CHARLIE COLE, to testify. MR. COLE - "I am here today to speak as passionately and as fervently as my sanguine personality permits in support of SB 185. First, let me relate to you some of history behind this proposed legislation. In March of 1993, last year, all of the lawyers in the Department of Law, members of the Department of Revenue, and expert witnesses retained in support of the prosecution of tax assessment against major oil companies met in the Seattle area to review the prosecution of the tax claims. After we concluded two days of review, we began to evaluate the various claims from the stand point of their settlement value. As we did, and as the lawyers gave their views on the value of the claims, they frequently commented, in their evaluation analysis, about statute of limitations problems involved in the various tax claims. Number 056 As we concluded the discussion on that issue, I asked them as the presiding person at this conference to furnish me with the amount at risk, and the issues involving the statute of limitations. They gave me a number which would knock your sox off, and I said, 'Wait a minute. We need to discuss this further.' And I reasoned since limitations had been imposed by legislative enactment, that perhaps the problems inherent in this issue could be addressed or ameliorated by a amendatory legislation. Legislation which was designed to be retroactive as well as prospective, and so when we concluded the conference, and returned to Juneau, I asked the lawyers in the Department of Law to furnish me with an opinion as to whether the statute of limitations involved in these issues could be amended retroactively. Around March 23, 1993, I received a very fine legal opinion which concluded there were no constitutional problems, essentially, involved in the enactment of statutes of limitations which could be applied retroactively to clarify those statutes, because the statutes certainly, at that juncture, had not been conceded by the Department of law to bar these claims. Number 103 The position of the lawyers in the Department of Law prosecuting these claims, at the time, was there was litigation, heavy litigation, if you will, then on going with respect to both the six year collection statute and the three year assessment statute. And, indeed a superior court judge in Anchorage had ruled the three assessment statuted barred certain claims assessed against the Exxon Corporation, and the case was being appealed by the State to the Alaska Supreme Court. So much for the history. After we returned and received the opinion on the constitutionality on the retroactive legislation, we in the Department of Law, with assistance of representatives from the Department of Revenue drafted proposed amendatory legislation, introduced as SB 185, which you have before you today. Let me now say a word about the purpose of the statute of limitations. I will keep it very brief. I am sure you know about it, but just let me say this, I quote from a opinion of the Alaska Supreme Court in which the court said that statutes of limitations are intended to encourage prompt prosecution of claims, and thus avoid injustices which may result from lost evidence, faded memories, and disappearing witnesses. However, the court went on to say this, 'Actions like the present one involving economic loss are often faced largely on documentary evidence, not unaided recollections, which quickly grow stale.' Obviously, I think that is what we have here. These claims are based largely on documentary evidence, and therefore, we are dealing with the application of the statutes here, which are primarily based upon documentary evidence. What two statutes do we seek to amendment by SB 185? There are two, as I say. One is AS 43.05.270 entitled Collection after Assessment. Subsection (a) reads thus, 'When the assessment of a tax imposed by this title has been made within the period of limitations under AS 43.05.260, the tax may be collected by levy or by a proceeding in court, but only is the levy is made or the proceeding is begun: Subsection (a) within six years after the assessment of the tax.' The key words there is 'the assessment of the tax.' Number 151 The assessment of the tax is governed by Section 43.05.260 entitled LIMITATION ON ASSESSMENT. Subsection (a) reads thus,' except as provided in Subsection (c) in AS 43.02.200 (b) the amount of a tax imposed by this title must be assessed within three years after the return was filed, whether or not a return was filed on or after the date prescribed by law. If the tax is not assessed before the expiration of the three year period, proceeding may not be instituted in court for collection of the tax.' And, thus we have two statutes which I refer to as the six year collection statute and the three year assessment statute. How do we wish to amend those two statutes. We do so by the proposed SB 185. Let me say that this senate bill contains lengthy recitals of findings of fact. I am not going to talk about those today. They may or may not be the subject of some controversy, but if you don't like the proposed findings, eliminate the ones you don't like. If you don't like any of them, eliminate all of them, but nevertheless, I urge you to enact this proposed statute in substance. And what do we propose to do by this statute? Well, what the amendment does, in substance, is provides the Department of Revenue may increase or decrease the amount of the tax due by issuing or amending (a) an assessment at any time during the administrative consideration of a taxpayer grievance on an assessment filed by the taxpayer under AS 43.05.240 or another Subsection (b) dealing with a claim for credit or refund of a tax filed by the taxpayer. Subsection (a) only deals with the three year assessment statute, and let me say what, in substance or in layman's language, it proposes to do is to permit an assessment to be increased or decreased if the taxpayer files an appeal, requests for an informal conference, or requests for a formal hearing. Number 201 If that process is activated at any time prior to the conclusion of that process, either by way of an informal conference or by way of a formal conference, then the assessment may be increased or decreased. It's not locked in. There is also the amendment to the proposed collection statute, the six year collection statute under .270 (a) which provides the tax may be collected by a levy if the levy is made within six years after the latest of any of the following: (a) the assessment of the tax, (b) the final administrative determination of the grievance, if the taxpayer files a grievance, or (c) the final judicial resolution of an appeal if the taxpayer appeals from the administrative proceeding. Paragraph (4) provides that these two subsections, which I have just mentioned to you, become retroactive to January 1, 1976. The issue is thus before you; should this proposed legislation be enacted. Let me tell you why it should, if you will. First, should the legislation be enacted prospectively? First, with the respect to the six year collection statute. I as you, does it make any sense to require a levy on an assessment before the amount owed by virtue of the assessment has become final. I think no one would argue that it makes sense to require, or the legislature to require, the executive branch of government to make a levy while the taxpayer is in the process of making an administrative appeal from the assessment or a subsequent judicial appeal from the administrative determination. And, when I served as attorney general, I said this statute is no problem if there is a $500 million assessment, the taxpayer has filed a request for an informal conference and the six year statue is about to run. Just get out a levy and go up and levy the taxpayer's property at Prudhoe Bay and be done with it, but I assure you as soon as you walked into their premises with that levy, they would say, 'Wait a minute. We will waive the six year statute,' because it doesn't make any sense to be levying upon an assessment before the amount owing has been finally determined. So I say, clearly and without reservations, you should adopt perspectively the amendment to the six year collection statute. Number 254 What about amendment the three year assessment statute, so as to provide that a change may be made in the assessment during the period of an administrative appeal. Is it unfair? Does it offend your moral sense, that if a taxpayer appeals and says, 'I want an adjustment to my tax assessment.' If in the course of that proceeding, the evidence show that the assessment is too low and should be increased, that's prohibited from increasing the assessment. The only evidence which may be considered by the hearing officer is evidence which decreases the taxes. What is so unfair to the taxpayer by allowing the State to amendment its assessment during the course of that proceeding. If, as the supreme court has said, this is largely a matter for issues to be determined by documentary evidence, then what is the harm to the taxpayer. And, furthermore, the option to allow the assessment to be increased lies with the taxpayer. The taxpayer need not appeal the assessment, but the taxpayer should not be given the advantage of only the taxpayer being able to reduce the amount of the assessment. And, furthermore, the taxpayer certainly, if it intends to prosecute an appeal, is not prejudiced by stale evidence, by fading memories, by disappearing witnesses. That is within the control of the taxpayer. The taxpayer is certainly not prosecuting its appeal in allowing its evidence, its documents to be lost or frittered away. The taxpayer has the ability to preserve fading memories by taking depositions; this is all under the control of the taxpayer. So, certainly the taxpayer is not prejudiced. From the standpoint of enactment of the amendments prospectively, to the three year assessment statute, it seems clear that this statute should be adopted. Furthermore, let me say, this is the very revision which the State of Texas has adopted in connection with its tax appeal provisions. This is not some new striking revolutionary legislation which was dreamed up by an aging attorney general. This is legislation which is right within the State of Texas, where big oil is headquartered, and they are not out urging the Texas legislature to amendment the statute because its so unfair. Ask them if they have gone down to the Texas legislature to say this is so morally offensive, so destructive, of this industry that we must have this legislation repealed. Of course not. They accept it. Number 310 This has been the practice in courts of law in equity for years, years, and years. And, in 1938, when the Federal Rules of Civil Procedure were adopted, provision was made in Civil Rule 15(c) for the adoption of the Doctrine of Relation Back, which says that if one files an action before the statute of limitation runs, and then in the course of that litigation, the statute of limitation runs, that the claimant may amend the complaint and have the amended claim relate back to the date the original action was filed. That had been the practice in the courts of equity, in courts of law, before 1938 when it became formalized in the Civil Rules, and the underlying reason is very simple. The underlying reason is that which I have related to you today, because it is not unfair for a person against whom, in this case, a claim is made to have the statute of limitations told - not run. And the reason the courts may, and the scholars say, is because this person, who is being sued is on notice that the claim is made against him or her. The person, individual, or corporation is in a position to preserve the evidence and not allow memories to fade and documents to go away, but that is not the case which we have here. The case, which we have here, is a case where it is the taxpayer, who controls that process, not the person making the claim against him in control. So therefore, in summary, prospectively this legislation should clearly be adopted. It is fundamentally fair and good public policy. After all, taxpayers, who are able to string out prosecution of their claims, or the final determination of them, by employing the finest lawyers and CPA'S in the world, and then say, 'Well, you know we fought the State, and the statute has run. Nice going, guys! We don't have to pay.' Now I tell you, the legislation in the State of Alaska should not permit that, because it is fundamentally unfair that people are able to do that to avoid payment of the just amount of money which they owe. Number 354 This is not seeking to change the rules for liability for taxes, its only seeking to make clarifications of the existing statutes governing the amendment of assessments. Now, let me say this, should this legislation be adopted retroactively? Well, if you follow the theory of Federal Civil Rule 15(c), if you follow the Historic Practices of the Courts of Equity and the Courts of Law, certainly there is nothing fundamentally unfair about making this statute retroactively. These taxpayers, since they received their assessments within the three period, have been on notice that these claims were being made against them. You think for one moment that they allowed their evidence, their documents to be lost, witnesses' memories to fade. I can guarantee you in the files they have statements three feet high of these witnesses. They know every thing that happens, and the records would probably fill this room, which they have appealed, and which they have kept. And, the reason is, because they knew these claims were being made against them and they needed to preserve that evidence, and that is why they have done that. So, there is nothing unfair about these statues being made retroactively. Let them come before you today, as they will, and say, 'We have been prejudiced. We will have been prejudiced if this legislation is enacted. We will have lost our ability to defend against an assessment, which has been increased, so as to seek to compel us to pay the amount of tax we really owe.' Finally, let me say this. These people will come before you today. They oppose this legislation, and they will predict dire consequences if this legislation is enacted, and they will tell you that it is unfair, terribly unfair. But, let me tell you, ladies and gentlemen, they oppose it, not because it offends their moral sense, not because its underlying policies are not sound, but because, and only because, it affects their bottom line. Thank you." (End of formal presentation by former attorney general, CHARLIE COLE.) SENATOR KELLY said the administration took these same arguments in front of the superior court and lost. Since it will be heard in the supreme court, he asked MR. COLE why he felt the legislature should interfere at this time with the legal processes going on. MR. COLE - "For the reasons which I have related to you because the Executive Branch of this government is under a statutory and constitutional duty to collect taxes owed by these tax payers. That they should not be able to avoid the payment of these incredibly large amounts of money, because of infirm and unsound limitations imposed by the legislature years ago, before almost 15 years of experience has shown they are unsound." SENATOR KELLY explained the bill was introduced last year, towards the end of the session there was a flurry of activity, and all of a sudden the administration dropped the attempt to have the legislation passed. He asked MR. COLE how and why that occurred. Number 407 MR. COLE - "The reason, senator, was not because of a position adopted by the Executive Branch of government. I could go a little farther in answer to that question if you would insist, but I would simply like to conclude my answer by saying, it was the sense that, at that time, because of the lateness of the legislative hour, that the bill was dead in the water." (SENATOR KELLY said it was introduced on April 7th.) SENATOR KELLY opened the meeting to questions and called on SENATOR SALO. MS. SALO questioned whether, if the bill is adopted, it would go into the whole court challenge that currently exists on the same point. MR. COLE - "I think the answer to that is simply this, and I don't mean to be flippant about it, but the answer is yes, because it substantially will affect the bottom lines, and surely, those affected adversely by the enactment of this legislation, would challenge it in every legal forum, as well as political forum in which they can. I don't begrudge them that. I would expect them to do that, but it will be, of course." SENATOR LINCOLN indicated she was not sure she understood MR. COLE'S answer to the question asked about the loss in superior court in 1992 on the time limitations. She asked what could be done differently before the superior court. MR. COLE - "You would substantially, in my view, be strengthening the State of Alaska's hand to collect validly due and owing taxes, except for the application of the existing statutes of limitations. Does the legislature wish to strengthen the State of Alaska's hands in the collection of these tax assessments by the enactment of this proposed legislation, or doesn't it? If you don't want to strengthen the state's hand in the collection of these taxes, you should say, 'We decline to enact this legislation.' If you want to strengthen the state's hand in the collection of these taxes, by all means you should enact this legislation." Number 453 SENATOR LINCOLN paraphrased his answer, commented the courts would hear the arguments again in May, and asked whether he thought the State would have much of a case. MR. COLE indicated he didn't say that, but they both agreed the State would have a weaker hand without the passage of SB 185. MR. COLE explained with the passage of the bill, the State would have a stronger hand. He said, "I support the State's position on appeal. I think it is sound, but the Alaska Supreme Court decides cases the way it sees them, and it may not see this case in the same manner in which the State sees it. I'm saying fervently, passionately believe the State's hand in the collection of these taxes ought to be strengthened, and I say it not because of the money, fundamentally, but because it is morally sound. These taxpayers have not been prejudiced by the running of the statute of limitations. If they were, one might say, 'Well, it is unfair. They have been prejudiced. Let us not be unfair to them,' but claim as they might that this is prejudicial to them, if I may assure you. It has not been." SENATOR KELLY questioned MR. COLE on his use of the word "State" and asked if he didn't mean "Executive Branch," and might the Supreme Court see it differently than he does. MR. COLE - "Of course, but the caption in the complaint is State of f Alaska Appellate, tax collector discharging its statutory and constitutional duties to collect taxes, taxes which, but for the running of the statute of limitations, by virtue of statutes enacted by the legislature, would have to be paid." SENATOR LINCOLN asked about the adoption of legislation or regulations addressing the collection of taxes in the State of Texas. She also asked the date and whether it was a long process. MR. COLE - "I didn't study the legislative history but I have copies of that legislation here and I can give them to you. It has some historical notes. Some of it, I think was first enacted in 1956, then I saw amendments in 1968, probably amendments in 1981. By writing the comptroller or the attorney general in Texas, I am certain you could obtain legislative history." SENATOR LINCOLN asked if it was very similar to the content of SB 185, and MR. COLE answered it was while looking for his copy. SENATOR LINCOLN asked SENATOR KELLY to get copies for the committee. MR. COLE - "Let me say this, it is almost right on, although I did notice in reading it, the legislation uses the term, administrative e proceeding." SENATOR KELLY directed MR. FINK to get a copy of the legislation. MR. COLE offered to provide copies. SENATOR RIEGER questioned MR. COLE on his schedule, and MR. COLE indicated he had planned to return to Fairbanks tonight, but he assured SENATOR RIEGER he would stay until the end of the hearing. Number 501 SENATOR SALO, in reference to his comments on moral dilemma faced by the legislature regarding the change in the rules, asked MR. COLE to expand a bit more on this point. She indicated the whole area of collecting taxes is much more complex, fraught with more disagreement than one would think in looking on the surface of it. She wanted to know if the legislature would be unfairly changing the rules, or were the rules ever clarified. MR. COLE - "Let me say this. First, very clearly, the rules determining tax liability, (1) the obligation to pay a given amount of tax, are not being changed by this in statute, (2) only being changed is the point in appeal process, or the chronological history of the tax appeal, when an amended assessment may be made. For example, let me put this case. Suppose an assessment is made for $10 million. Taxpayer files a notice of request for informal conference by way of a grievance, and discussions are held by this informal conference, and the Alaska Supreme Court comes down with a decision which changes the substantive rules for determining tax liability, and that decision, if applied to the pending assessment, would then permit an increase in the assessment. Under the existing rules, if the three year statute had run, that assessment could not be amended. Or suppose during a formal conference, the three year assessment having run, and the taxpayer in the formal hearing presents evidence by the taxpayer's own documents that the assessment is too low, under the existing statute of limitations. The taxpayer would say, 'I don't care what our evidence shows, you can't increase the amount of that assessment.' The only thing the hearing officer can do is decrease the assessment. I say rhetorically, is that fair to the State of Alaska to not be able to increase its assessment, the only thing that can happen is the assessment be decreased? I mean, if the determination is made that the amount of the assessment is not accurate, and it inaccurately reflects the amount of tax the taxpayer is owing, why is it so unfair about allowing the Commissioner of Revenue to increase the amount of the assessment. I say none. The taxpayer is not prejudiced. They have all of the evidence there. They are the ones that presented it." Number 544 SENATOR PEARCE suggested that if all of the cases were as straight forward as the one MR. COLE put on the table, she doubted anyone at the table would disagree with him. She didn't think any of the committee members were qualified to figure out, or whom to ask, about assessments that are still being gathered from decades ago. She asked, in reference to the assessments being dealt with in the bill, if it made sense to MR. COLE to go back and redo the assessments. She also asked how the legislators can know whether the State employees kept those assessments from being made in timely manner, at which time she didn't think it was fair to go back. MR. COLE - "First, no one more fervently believes than I, this process has got to be speeded up, to say the least, and further more let me say this, sort of off the mark, 'I would urge the legislature to form a committee and to look at this whole underlying issue about how you value this oil.' That is where one of the major problems comes from, but in direct response to your question, assume, arguendo as they say, that the State has been tardy. Just assume that, and they haven't gotten these assessments done as promptly as they should have. I don't concede that, but assume that for the purpose of my response to your question. How has the taxpayer been prejudiced? You see, the taxpayer could have said, 'I want a formal hearing. I want to get this over and behind me.' The taxpayer didn't request formal hearing to get this done, and wound up, (so they could present the payment). Maybe, I am not saying they did, they thought it was better to string this stuff out, because, given the interest rate which was accruing on these assessments, that it was better to string them out and not pay the tax, because the price of money they would have to use to pay the assessment was more costly than the price of the State financing, which they were receiving by not having to pay these taxes. So what I am saying, in the final analysis, they have not been prejudiced, they have been able to be on notice that these claims are being made against them, that they can preserve their evidence, they can preserve their witnesses, and their cases is ever bit as sound today as it was on three years plus one day after the assessment, after the return was filed. What I am saying is, it is not unfair because they have not been prejudiced, although they will say they have been prejudiced. They will tell you all sorts of horror stories, but the fact of the matter is, and I will put the focus on it with an electron microscope, you will find they have not been prejudiced." Number 587 SENATOR SALO explained MR. COLE had touched on one of key issues being dealt with, and she asked why the settlements are taking so long, and why all are contested. She questioned, if SB 185 was enacted, if this would create less incentive to settle and how MR. COLE saw this question. MR. COLE - "Bunkum! Total bunkum! The statute of limitations has nothing to do with that, and I've testified on this subject before. I'll send you a transcript of my testimony as soon as I correct my bad grammar. That's another subject, why these things are taking so long, and what needs to be done. I would like to comment on it, but I think I will reserve my comments if you don't mind." SENATOR SALO asked for clarification on his position that the bill does not adversely affect incentive to settle. TAPE 94-18, SIDE B Number 001 MR. COLE - "I think the enactment of this bill would increase the industry's incentive to settle. I think so strongly because their in a position, we can't avoid our liability by relying on the statute of limitations anymore, so we should sit down and talk turkey with the State. That is what I think, and frankly, I thought that on April 7, 1993, but I just wasn't able to pull it off. Sorry." SENATOR SHARP explained, three or four years ago in Resources Committee in the other body, there was an indication from Revenue Commissioner at that time, that they really didn't know what the tax should be. He quoted the commissioner as saying they doubled or tripled it, and filed an assessment. SENATOR SHARP didn't think there would be a rush to settle those kinds of situations without some kind of ongoing negotiations, and he thought that might be part of the problem, in some instances. MR. COLE - "Just let me say this. Taking that testimony, and then I read in the media that these taxes, which have been assessed, are owed. Not simply assessed, but they are owed as if they were adjudicated as a legally binding obligations, and then one seeks to deal with these statute of limitations problems, which I have talked about this afternoon. You get beaten up to a pulp in the press, because one tries on behalf of this state, to address these problems, and if you settle any of these claims that have been doubled or tripled, if they have been, as you say, then people say, 'The attorney general is giving away the farm.' So, what do you do?" (unintelligible phrase) (Thus ended the verbatim testimony of former attorney general, CHARLIE COLE.) SENATOR KELLY explained the committee was being asked to interpose in a matter that's in the court on behalf of one litigant, but he said there were two sides to the story, so there were a lot of people who wanted to testify. He decided to move from one position to the other in accepting testimony, and he began with LARRY KIMBALL of the Cook Inlet Region, Inc. Next would be COMMISSIONER DARREL REXWINKEL from the Department of Revenue. Number 033 "I work for Cook Inlet Region, Inc. and LAWRENCE KIMBALL is my name. CARL MARRS, Senior Vice-President and generally in charge of oil and gas issues couldn't be here today. He has asked me to present his testimony to you on this issue. Also, what we want to do is convey mainly some concerns that we have. CIRI is a company is Alaska owned, Alaska based, and whose shareholders depend upon the long term health and stability of the Alaskan economy. (At this point, MR. KIMBALL read a prepared statement by MR. MARRS, which is entered in its entirety.) "There are two major concerns if SB 185 becomes law, which I would respectfully ask you to give careful consideration. The first is that SB 185 likely would increase, rather than decrease, the litigation, delay, and expense of tax collections. One purpose of SB 185 appears to be to give the Department of Revenue more negotiating leverage in tax collection cases, making it able to increase the amount under negotiation by increasing the assessment. However, when the rules are clear, fair, and consistently applied, taxpayers will be more likely to voluntarily comply and pay tax amounts that fairly approximate their liability. If, however, the process is adversarial from the outset, and the department in essence has the power to raise the stakes throughout, all parties will revert to protecting their positions, making fair compromises more difficult and costly to achieve. A second concern is that it may discourage a small company (like CIRI) from exercising its right to appeal a tax assessment that it genuinely believes is erroneous. A taxpayer who desires to challenge an assessment will fear - and understandably so - that a new, higher assessment will be imposed during the appeals process in order to discourage appeals by others. On the issue, like the issue of the retroactive effect of the statute, I encourage the legislature to obtain impartial constitutional advice. This bill, which seems to be directed at the large oil companies, adversely affects smaller Alaska companies as well. First and foremost, our company depends, as does everyone in the state, on a healthy, long-term Alaska economy. At CIRI, we believe the continued strong presence of reinvestment by, and success of the oil industry is crucial to everyone in our State. The Alaska Oil & Gas Association has outlined the detrimental effects of SB 185 on continued investment in Alaska, and I will not repeat - but do endorse - the points they have made. What you may not know is that CIRI, along with Doyan, Nana, and other ANCSA Regional Corporations, own small minority interests in certain Alaska producing oil fields. We have made these investments in part because we believe in our State's future, and the money we earn from them is distributed to our shareholders as well as other ANCSA Corporations statewide through Section 7(i) requirements. For the most part, revenue generated is pumped back into the Alaska economy. CIRI, along with other small independent producers, pay production taxes on its share of substances produced. Although we depend entirely on the operators to set the value on which we pay our taxes, we can be - and have been - audited and assessed. It is not fair to us for assessment to reach back to 1976, for assessments to drag on for years, and for the department to be able to increase assessments even as they are properly being challenged. Laws, when passed, must be universally and uniformly applied. The adverse affects that may have on the large companies will be felt by the smaller producers as well, like CIRI. And those effects will be severe enough to ultimately discourage further investment in our State's resources by smaller producers. In short, CIRI is opposed to the passage of SB 185. We do believe its procedural provisions introduce unfairness into the tax collection process. The proposed provisions are likely to produce an adverse effect on the economy that you do not desire. Instead, it is sufficient to let the Department of Revenue use the extensive audit and assessment powers it has now in a timely and consistent fashion." (This ended the prepared statement read by MR. KIMBALL.) Number 505 SENATOR KERTTULA asked MR. KIMBALL if he believed the taxpayers should pay their taxes if they are due the State. MR. KIMBALL answered that CIRI pays a fair amount of taxes. SENATOR KERTTULA questioned MR. KIMBALL about doing business with other major oil companies and its other departments. MR. KIMBALL asked he was referring to other than oil and gas, and SENATOR KERTTULA asked about drilling. MR. KIMBALL said CIRI has one of its own wells in West Fork, a partnership with Doyan and Nana Corporation, and owns a small percentage in an oil company in Endicott. SENATOR KERTTULA asked for the number of members in CIRI, and MR. KIMBALL said there were 6700 shareholders - Alaskans. SENATOR KERTTULA explained he always reasoned that if the State collected full share of its revenue due it, those 6700 people would receive more in allocations for schools and other programs than they will directly from a very modest amount that CIRI may be taxed. He expressed annoyance at testimony which conflicts with the shareholders' needs. SENATOR SALO asked MR. KIMBALL whose fault he thought it was that assessments had dragged on for years. MR. KIMBALL thought it was the State that has dragged the assessments out, but he didn't feel qualified to say how much. SENATOR KELLY asked MR. KIMBALL whose fault the superior court decided it was, and MR. KIMBALL didn't know. SENATOR KELLY asked MR. COLE what was said on that issue. MR. COLE said he had a copy of the opinion. SENATOR KELLY called for a short recess, after which the committee listened to COMMISSIONER DARREL REXWINKEL from the Department of Revenue, testify on SB 185. Number 115 MR. REXWINKEL indicated his support of the testimony given by former attorney general, CHARLIE COLE, and he introduced a letter from BRUCE BOTELHO, the present attorney general, addressed to SENATOR KELLY in regards to SB 185 on the statute of limitations question. MR. REXWINKEL explained that MR. BOTELHO'S letter provided some excellent background information regarding the statute of limitations issues. He pointed to the first paragraph which talks about the need for clarification of the statutes as the issue in this bill. MR. REXWINKEL read the following paragraphs from the letter: "So we need to be very clear that what is at stake here is not a dispute about how much tax oil companies, or an particular oil company, should pay. It is not a dispute about whether the Department of Revenue's assessments reflect a correct or incorrect application of the production tax or income tax laws and regulations. What is at stake here is whether there can even be a determination of who is right and who is wrong, and how much tax is actually owed under the state's revenue laws. What the administration is saying is, let the taxpayers exercise all of their rights to contest the Department's assessments on the merits; ..." At the bottom of the page, MR. REXWINKEL read: "Remember that the only situations affected by the bill are those in which the taxpayer has already been notified before the three-year deadline that the Department of Revenue disputes the return, and where the taxpayer is entitled to present new evidence and arguments concerning its tax liability, and the Department is charged by statute with determining the correct amount of tax due. The bill's opponents would like this to be a one-way street: they are happy to have the amount corrected downward, but they want the Department barred from determining the correct amount of the tax if that amount turns out to be higher than the initial assessment. That is perfectly understandable, since it furthers each taxpayer's individual financial interest, but one could not call it fair." MR. REXWINKEL referenced page 5 of MR. BOTELHO'S letter to the paragraph entitled VALUATION OF ANS IS DIFFICULT FOR MANY REASONS, which he believed answered SENATOR SALO'S questions. On page 6, he read the headlines and a bit more: "A. The sheer volume of crude and number of dispositions make the audit process difficult and time-consuming. I have given you the statistics for the first decade of North Slope production, but I want to emphasize that when this huge field began production, there was no model that the Department could look at to figure out how the system worked. The producers created and controlled the system, which was influenced heavily by the world oil market and events in the Middle East, as well by U.S. price controls." MR. REXWINKEL next referred to B. on page 7 to talk about how the ANS trade is unique; it is not like other domestic crude oil in the way it is traded or transported. On page 8, item C., he read: "Another key factor contributing to the difficulties in valuing ANS S is the way that ANS is disposed of by the producers. Almost all North Slope crude oil is disposed if in two ways: it is either internally transferred and refined by the producer, or it is exchanged for another crude or crudes which are refined by the producer." MR. REXWINKEL continued quoting from the letter on page 11, item D. which stated: After the value of the crude is determined, the Department has to audit the transportation cost of moving ANS from the North Slope to the destination market." He also read the Summary at the bottom: " This is all to say that the task of determining a value for ANS is uniquely complex and difficult undertaking. It took the state experts in the royalty litigation years to compile the data and reach agreement with the producers over the disposition of much of the ANS produced. It is not surprising that the Department of Revenue also needed time to do the job correctly." (Thus ended MR. REXWINKEL'S background information, and he suggested everyone read the letter.) MR. REXWINKEL said that copies of his testimony were distributed to the members of the committee, parts of which he planned to review: "This is a significant issue for the State of Alaska. Presently, we have assessments outstanding plus penalties and interest surrounding the three year and the six year statute of limitations approaching $3 billion. Certain producers have challenged the Departments ..." SENATOR KELLY interrupted to ask if the $3 billion total, is being discussed in the narrow definition in reference to the bill. Number 159 MR. REXWINKEL explained there were two items being discussed in the bill, one is the three year audit statute and the other is the six year connection statute. He said the sum total of the two statutes in amounts that could be under question, is approaching $3 billion. SENATOR KELLY asked for an explanation of his answer, since he was under the impression the committee was addressing about $600 million that might be at stake. MR. REXWINKEL recalled back in 1992, an auditor in the Department of Revenue tried to provide testimony to the court to approximately that amount of money in tax assessments. He said some of the taxes are very old, with accumulated interest in excess of that which was assessed. SENATOR KELLY opined the legislation would not only retroactively tax them, but charge them interest on taxes they didn't know they owed at the time. MR. REXWINKEL objected, saying it was not a matter of retroactive taxation, but it is a matter of taxation, and tax accumulates interest. SENATOR KELLY asked how much more is in dispute, what is the total. MR. REXWINKEL explained the total in taxes assessed, penalties and accrued interest is approximately $5.5 billion. SENATOR KELLY clarified that SB 185 affected $3.3 billion of the amount, and MR. REXWINKEL said he was correct. SENATOR LINCOLN asked if the amounts went back to 1976, and MR. REXWINKEL said it would be going back to all of the uncollected taxes going back that far. SENATOR KELLY invited REPRESENTATIVE MIKE NAVARRE to the committee, and MR. REXWINKEL continued his testimony. Number 190 MR. REXWINKEL returned to the prepared statement to give some additional history: "The charge to the Department of Revenue is set out in AS 43.05.010. The Commissioner of Revenue must administer the tax laws of the State of Alaska including the inspection of tax returns, inspection of books and records, and the holding of conferences and hearings to determine the correct amount of tax due and to resolve disputes. The Attorney General and the Department of Law are significantly involved in these processes. The Petroleum Division was created in 1975, prior to TAPS coming on line in June of 1976. In 1976 the oil and gas separate accounting income tax was passed by the legislature. The Department of Revenue adopted regulations to implement this act in February 1979. The separate accounting income tax was subsequently challenged as unconstitutional by the producing companies, but the state was ultimately upheld in the United States Supreme Court, even though the state had by then repealed the law. (separate accounting tax) Through December 1977, the Petroleum Revenue Division had only one Revenue Field Auditor. Tax returns were filed with the Department of Natural Resources. By December 1979 the staff was increased to seven positions including five field auditors. Between 1983 and 1985 the staff grew to eight field auditors. In July of 1985 the Petroleum Revenue Division was combined with the Audit Division. Prudhoe Bay oil producers had seen nine years worth of production flow down TAPS and filed in excess of 200 monthly production tax returns each year. For some years the number of returns is double or triple that because of the filing of one or more amended returns for a month or group of months. In December 1986, the Oil & Gas Audit Division was formed and the staff was increased to fifteen revenue auditors, two audit supervisors, two tax examiners and three appeals officers. Currently we have sixteen revenue auditors, one audit supervisor, four appeals officers, one appeals supervisor, six members of the economic research staff, and two in the property tax section, one assistant to the director and four support and return processing positions. The procedures prescribed for tax dispute resolution are set out in the Alaska Statutes and the Alaska Administrative Code (the Regulations). The "normal" procedure consists of an audit of a taxpayer's returns performed by the Department of Revenue, the issuance of an assessment of tax due with a notice of deficiency. The assessment is issued within the 3-year statute of limitations (or the agreed-up extension period). The problem occurs when the department sees a need to make changes as the result of information developed during the administrative appeal. If a taxpayer disagrees with assessment a Request for Appeal must be filed by the taxpayer within 60 days of the receipt of the notice of assessment. The taxpayer may request an appeal at the informal conference level to provide additional facts, documents or relevant information. Or the taxpayer may request a formal hearing, conducted in a more formal legal setting, with the ground work being laid for subsequent litigation if the case remains unresolved or if further appeals to the Alaska Superior Court or Alaska Supreme Court. Number 230 The assessments dealing with both production tax and separate accounting income tax are highly complicated and deal with highly confidential areas of valuation of the oil and the cost of transporting the oil since Alaska's taxes are based on the value, net of transportation costs. Any impact upon these two factors means millions of dollars in tax. To determine the value of oil for tax purposes, essentially every barrel is traced during audit to the sales delivery point, normally the west or gulf coasts of the United States. Every barrel is also traced to a sales contract, which is examined to determine the actual consideration received by the taxpayer and then that is compared to what was reported on the tax returns and to the Department's own determination of the prevailing value of the oil in the market where sold. This process requires voluminous data be obtained from the producing companies and careful evaluation of that data to determine the consideration received by the producer, since much of the oil is traded in-kind or refined by the producer, and not sold outright for cash. It takes professional judgement along with sophisticated factual data analysis to determine the value of the oil for tax purposes. Alaska's oil and gas does not get to market until weeks after it is produced. the production, transportation and marketing activity encompasses many diverse and often geographically distant affiliates of large integrated oil companies. The compilation of information for just filing the tax returns involves many individuals and volumes of information. Amended returns are often filed many months and sometimes years after the original return is filed is the rule. Any resistance or hesitation by the taxpayer companies to provide this data slows the audit process to the extent to where an auditor frequently must request a written consent of the taxpayer to extend the period of audit under the three-year statute of limitations. Taxpayers seem to be increasingly hesitant to grant such waivers. The auditor may be forced to issue an assessment based on insufficient information, if factual data is not forthcoming during audit field work. The taxpayers then try to settle during the administrative appeals process on some other basis, in hopes of avoiding the production invoices, contracts and records concerning the real consideration received for their oil. One begins to grasp an understanding of the tremendous workload in terms of work-hours, document production and computer data processing required. We are dealing with some of the largest and most sophisticated corporations in the world. A dispute over taxes quickly evolves into a major legal contest of skilled attorneys and credentialed expert witnesses pitted against the State. In a recent formal hearing completed by the Department, a single taxpayer produced over 120 boxes of documents. The administrative hearing record consisted of about 40,000 pages. Given the large volume of oil, the large number of contracts and the relatively few auditors, it is a high-stakes game the taxpayers play well and to their advantage. Taxpayers have attempted to use the three-year audit limitation and a six-year collection limitation period to prevent the Department from determining or collecting the correct tax due based on factual information discovered years after the fact. Even the utilization of the North Slope Oil Field and the multiple- ownership of TAPS have, despite their efficiencies, created disputes among and between the producers themselves that have taken many years to resolve. Section 2 of proposed SB 185 ensures that the Department may utilize information discovered during the course of an appeal in determining the correct amount of tax due. This is only common sense. At the present time, the Division's normal audit practice is to audit three or four years of monthly oil and gas production tax returns in a single audit program. We are presently auditing the 1987 - 91 period of the major producers. Number 284 While some taxpayers may try to provide us information to complete the audit assessments, we frequently find that the information is incomplete and additional information is necessary to accurately analyze and develop audit issues. If the deadline expires prior to receipt of the necessary data, assessment is based on incomplete information. If SB 185 is not passed - audits may not be completed and disputes from assessments will occur, resulting in re-auditing during the administrative appeals process. Too much tax revenue is at risk to allow oil and gas producers to go un-audited because of unrealistic statute of limitations restrictions. In the face of the reduced oil prices on the world market and the inevitable decline in North Slope oil production, every dollar of tax assessed in our audits, and ultimately collected under Alaska's tax laws, become more important to the state Treasury. It is not uncommon to receive comments about how old some of the oil and gas tax cases are. Let me point out that the recent Aramco case decided by the U.S. Tax Court last December involved complex issues similar to those arising under Alaska's production tax and dealt with the 1979 - 82 tax years. That case, and the Amerada Hess Royalty litigation, both illustrate the amount of time and work involved in resolving these complex matters. These cases should dispel any thought that these lingering disputes are due to lack of activity on the part of the State of Alaska, which has been diligent in pursuing resolution of these matters. The division presently has five assessments of AS 43.50 oil and gas production tax against three producers whose assessments were corrected based on information disclosed during the informal conference or formal hearing stage. The taxpayers potentially have much to gain by defeating SB 185. Much of the Department's ability to issue these assessments has arisen directly from data obtained through litigation against the taxpayers in the Amerada Hess Royalty Case. One producer even developed a method of concealing the actual disposition of barrels of ANS exchange from the consideration received, thereby burying the audit trail. It has only been through legal discovery in the Amerada Hess Royalty case and the great volume of documents produced to the State's attorneys, that auditors were finally able to obtain disposition of ANS crude. That case took almost 10 years to prepare and many tens of millions of dollars in legal and consulting fees! Without the data obtained in the Royalty litigation, much of the information used by our auditors would still be unavailable through the peeling of the onion approach that producer company tax personnel put in front of the State of Alaska auditors. If the State was unable to toll the three-year and the six-year statute of limitations during the administrative appeals process, the State would be barred from determining the correct tax due under Alaska law. It is that amount to which the State is legally entitled to, and only that amount, that the Department of Revenue is trying to assess and collect. One need only to look at the recent history of settlement revenues received to grasp the magnitude of impact upon the State Treasury these cases have. In summary, because of the large amount of public revenues at risk and the Division's long-standing position and desire to assess and collect the correct amounts of oil and gas production and "separate accounting" taxes due the State of Alaska, I again, urge you to pass Senate Bill 185 which confirms that the six-year collection statute of limitations is tolled and allows for the issuance of amended assessments during the administrative appeals process." (Thus concluded the formal testimony from COMMISSIONER REXWINKEL.) SENATOR KELLY opened the meeting to questions, and invited REPRESENTATIVE NAVARRE to speak. REPRESENTATIVE NAVARRE asked, with all of the information from Amerada Hess and other litigation up to this point, how long would it take for an accurate assessment process to be initiated today. MR. REXWINKEL said it would depend, and since they were more current with the 1987 to 1991 time frame, and he explained the advantage of doing multiple years because of the audit efficiency. He also explained many of the taxpayers liked to maintain a certain amount of confidentiality over their sales agreements and other contracts for a period of some time. MR. REXWINKEL explained the production tax is based on the value that could have been received, and they have to look at the prevailing value. He also explained the difficulty because a lot of the oil is either refined or exchanged, including multiple exchanges. These chain of exchanges require complex procedures. If they were all straight cash sales with no other consideration involved the process would be easier. MR. REXWINKEL claimed they had the barrel tracking down very well, also. Number 340 MR. NAVARRE questioned the barrel tracking procedures and asked if all of the procedures had been made easier since the litigation such as the Amerada Hess case. MR. REXWINKEL explained the Amerada Hess process provided his department with the data base of all the past years and was a tremendous help with respect to determining the amount of production and the barrel tracking in the years up to Amerada Hess. He said, subsequent to that, it gave us a good base of knowledge, plus the barrel tracking process because easier with better records. MR. NAVARRE questioned whether the bulk of the taxes, interest, and penalties that are due the state for prior years, were from years when arguably the state did not have the information necessary to make an accurate assessment. MR. REXWINKEL said he was somewhat correct. He explained it had taken an extended period of time to receive all of the factual information upon which to base a proper assessment of taxes. SENATOR SALO asked, in relation to the history on the number of employees back in the late 1970's, if the information about the value of oil was determined largely on information from the taxpayers themselves. She wanted to know how that had changed. MR. REXWINKEL explained the factual information, such as contracts and the barrel tracking, initially came about during the Amerada Hess litigation. Since that time, he further explained, we have been in a much better position, also, due to the increased staff, within what is now the Oil & Gas Audit Division. He gave credit also to an economist division headed up by DR. CHARLES LOGSDON, the Chief Petroleum Economist, which helps in some of the value considerations in other areas of the economy with prevailing value issue. Next, SENATOR KELLY introduced JOE HOUSEHOLDER, the General Tax Counsel for Unocal Corporation, to testify on behalf of the Alaska Oil and Gas Association (AOGA), and as chairman of the AOGA Tax Committee. He distributed copies of his prepared statement. Number 380 MR. HOUSEHOLDER explained, before he read his prepared statement, he wanted to make a few points about CHARLIE COLE'S impassioned plea, on behalf of the bill: "First, he indicated several times that we were in control of whether or not to appeal, but the department controls the timetable of these appeals, both informal and formal. Thus, we are damaged by evidence or people lost by delay. Also, the department raises new issues, so how could be have three feet of depositions on issues that are raised after people die or are otherwise incapacitated. Realistically, they are in control, they, the audits, and the appeals on their schedule. When they are done, tho, they should be done. There must be an end. Second, the State of Texas provision is not the same. It is complex and although I have not studied it in detail, it appears to me from reading it, that it only allows changes during the appeals process during an open statute of limitations period, and then only up to the amount of the original assessment. Third, why is it that only we care about the money, and not the morality, but he cares about the morality, and not the money. I don't think the two can be divorced. Fourth, he says they are not changing the substantive tax law, only the procedural rules, but this is semantics. It is not a direct change, but indirectly it allows him to continue to raise new issues, and change their interpretation of old issues for an indefinite period of time. Fifth, MR. COLE said we have not or will not be prejudiced, that we are voluntarily extending to save money on interest or in hopes of reducing the tax. That is just bunko, but if we did not agree to extend the statute, we were constantly threatened with larger assessments, and those companies that challenged them on it, called their bluff, they lost, were assessed large penalties, sometimes multiples of the tax. Finally, and most importantly, he said it will be an incentive for the industry to settle if you approve this bill, but should you decide to approve this bill, and we certainly urge you not to, it will definitely be an incentive for the Department of Revenue never to settle. They will drag these appeals out forever, and continue amending assessments ad nauseam. Now I will read our prepared remarks." Number 451 REPRESENTATIVE NAVARRE quoted MR. HOUSEHOLDER as saying those would not agree to extending were punitively assessed. MR. HOUSEHOLDER - "I believe that's the case. We, at Unocal, always extended, but whenever we were in a position where we thought we probably shouldn't, we were told we were just going to get a larger assessment, because we got to protect our interests. And, we do know that other people have told us they were assessed large penalties in these situations." REPRESENTATIVE NAVARRE asked if had looked at it from the department's perspective, under the mandate they have in statutes, and whether it is in the State's best interest if they don't have adequate information to make an assessment. Shouldn't they assess a larger number and then go back. MR. HOUSEHOLDER - "I guess I would ask a question in response to that. How long do they need? Some of these are ten years passed the tax period. I think they have had adequate time. Its just that they continue to invent new issues and look for new things, and how long are we going to let it go on?" SENATOR KELLY asked to listen to MR. HOUSEHOLDER give his prepared testimony before more questions. MR. HOUSEHOLDER - "Thank you for this opportunity too testify on Senate Bill 185. AOGA is a trade association whose member companies account for the majority of oil and gas exploration, production, transportation and marketing activities in Alaska. AOGA absolutely opposes SB 185. This bill represents unwise and unfair tax policy. It would set terrible precedent. It will provoke more litigation that it would resolve. Even the findings it purports to make as justification for what it does are incomplete, misleading or simply untrue. Let me examine what SB 185 would do, in order to explain our reasons for such strong opposition. SB 185 proposes to amend the statutes of limitations for taxes. There are two of these statutes. One gives the Department of Revenue three years from the time a tax return is filed, in which to audit the return and issue an assessment for additional tax. The other gives the Department six years from the time it issues a tax assessment, in which to go start legal proceedings to collect the tax claimed in the assessment. There is no need for this legislation. Under current law each of these statutes provides that the time period may be extended by mutual agreement between the Department and the taxpayer, and there is no limit to the number of times an extension may be further extended by mutual agreement. Since the very beginning of oil and gas production in Alaska, it has been the general practice of oil and gas taxpayers to agree to extensions whenever the Department asked for them. This is common practice both within and outside Alaska. It is also fairly well settled law, at least in the U.S., that once a statute of limitations period has expired, it cannot be resurrected, despite the willingness of the parties. That brings me to an interesting point with respect to the subject matter here. While I am not personally knowledgeable about the tax affairs of other AOGA members, I am familiar with those of Unocal. Unocal has typically received its assessments on, or after, the very last day of the extended limitations period - which, by the way, may have been 10 years after the taxable period. How then, could our appeal of the assessment be found to extend the limitations period which has already expired by the time we file the appeal? I'll tell you, the fact is that the Department is asking you to enact legislation which will likely be unsuccessful in the Courts. It is only the retroactivity they can be interested in because they have not asserted a problem with receiving waivers under current law. Speaking of the courts, let me tell you what they say: 'The purpose of statutes of limitations is to encourage promptness in the prosecution of actions and thus avoid the injustice which may result from the prosecution of state claims. Statutes of limitations attempt to protect against the difficulties caused by lost evidence, fading memories and disappearing witnesses.' These aren't my words, nor the words of anyone else with AOGA. They are the words of the Alaska Supreme Court in Byrne v. Ogle, reported at page 718 in Volume 488 of the Second Series of the Pacific Reporter. Think about that for a minute. The purpose is 'to encourage promptness ... and thus avoid the injustice which may result from the prosecution of state claims.' How might this 'injustice' occur? Because of 'the difficulties caused by lost evidence, faded memories and disappearing witnesses.' In other words, as time passes it gets harder and harder to prove what exactly you did and why you did it. Number 500 Statutes of limitations are suppose to let you defend yourself while you still have the evidence available to do it. AOGA members are facing tax claims based on events 15 years or more in the past. Not only do memories fade and witnesses disappear during such a long time, but people may die and documents may be difficult to locate. Even corporate taxpayers may merge and disappear altogether during such a long time. Now, what does SB 185 propose to do? Well, Section 2 would amend the three-year statute of limitations to allow the Department of Revenue to 'increase or decrease the amount of tax due by issuing or amending an assessment at any time during the administrative consideration of a taxpayer grievance on an assessment[.]' In other words, instead of requiring the Department to do its audits and make its claims while the evidence is still fresh, it will allow the tax audits to drag on while the Department and its outside consultants try to invent new ways of viewing the past. All it will need to do is issue an assessment for substantial sums that is full of mistakes or questionable claims, and that will force the taxpayer to appeal. Under the proposed changes, there is no restraint on how long the appeal process can go on and the Department could make assessments indefinitely so long as it held the appeal within the Department's procedures. But SB 185 goes beyond being an open invitation for the Department of Revenue to ignore the quest for prompt and reasonable audits. So far only a handful of tax appeals have made it into court and become public. But it is clear from those that have become public, that the Department at various times in the past has told taxpayers what the tax rules mean and how they should comply with the law. Sometimes this advice came from the Department's auditors during an audit of the taxpayer. Sometimes it came from the Commissioner of Revenue. sometimes it came in the form of instructions on the tax return forms. One would expect taxpayers to follow such advice when it is given. Indeed, if they don't follow it and don't have a reasonable cause for not following it, they can be subject under AS 43.05.220 to negligence and failure-to-pay penalties of up to 30% of the amount of their underpayment. But as the years passed and the tax appeals dragged on and on, something bad started to happen. The Department began getting new advice from outside consultants and lawyers about how much more taxes could have been due if the Department hadn't given it original advice. Some of its own auditors also found ways to claim additional taxes if only the Department hadn't given that inconsistent earlier advice. And so the Department began issuing new assessments which repudiated its earlier positions and its advice that taxpayers had relied on. Instead, the new assessments asserted different positions under strained and unexpected re- interpretations of the tax statutes and regulations. SB 185 would ratify this process of retroactive revisionism. As long as the Department still has a taxpayer's appeal pending before it, its audit and litigation teams would be free to develop radical new theories for yet more taxes and, under SB 185, they could amend the assessment to incorporate those new positions. How does this square with the idea of 'avoiding justice' due to 'difficulties caused by lost evidence, faded memories and disappearing witnesses' which the Alaska Supreme Court said was the purpose of s statute of limitations? Well, of course, that's a rhetorical question because it's obvious SB 185 doesn't square with that idea at all. Until a tax appeal finally makes it out of the Department and into court - which could be 10, 15 or perhaps even 20 years or more after the fact - there would effectively be no three-year statute of limitations at all under Section 2 of SB 185 and no limit on the exposure that a taxpayer may face simply for having appealed an assessment containing mistakes. Section 3 of SB 185 effectively removes the six-year statute of limitations as well while a tax appeal is pending before the Department. That section proposes to amend the six-year statute so that the six-years don't begin to run until 'the final .... TAPE 94-19, SIDE A Number 001 (MR. HOUSEHOLDER continues to read his prepared statement.) ... administrative determination of the grievance[.]' In other words, the six years don't start until the Department finally issues its final decision in the tax appeal and the matter moves on to court. So between Sections 2 and 3 of the bill, there would effectively be no statute of limitations at all until the Department has finished its consideration of the tax appeal. We in AOGA do not believe this is a sound policy for Alaska. This is not an easy time for the Alaskan oil industry. Prudhoe Bay production has been in decline for five years and is down by 25% despite billions of dollars of continued capital investment during the same period. This year and in the coming years other fields on the North Slope will begin their own production declines. Cook Inlet production has been in decline for over 20 years. On top of this, we have been hit by low oil prices, which makes it that much tougher to continue the investments that need to be made to slow down the rate of decline. Each company up here is competing for money against other parts of the same company. None of us can afford to make all of the good investments that we have opportunities for. So we only choose the best investments. Not just the best economically - often the opportunities elsewhere are economically comparable to the ones here. In such cases, if we are to make the Alaskan investment instead of the other one, there has to be something else that gives Alaska a competitive edge. SB 185 would take away some of Alaska's current edge in these decisions because it would increase the uncertainty about what our tax obligations are. We can pay today exactly what the Department of Revenue tells us to pay, but we would have no assurance that the Department will not change its position in the future and try to apply the new position retroactively back to today through the audit and appeals process. Both ARCO and BP have said that half the North Slope production they expect to see in the year 2000 - just six years from now - could come from investments that have not yet been made. I submit that if Alaska de-stabilized its tax system and scares off those investments, the cost to the State in terms of lost taxes and royalties from the production will exceed any extra taxes that Alaska might gain by adopting SB 185 and trying to administer its taxes by hindsight. So far I've been talking about the problems with Sections 2 and 3 of SB 185. Before I move on to other parts of the bill, let me make two final points. Number 051 One, why is Section 3 necessary? The Department of Revenue controls the pace of the tax appeals process within the Department. Under the Department's own regulations, 15 AAC 05.030(e)-(g), the administration hearing officer sets the schedule. If a taxpayer tries to drag the hearing out unduly, the hearing officer has the authority to cut off 'irrelevant and unduly repetitious evidence[.]' 15 AAC 05.030(h). So if the Department, not the taxpayer, controls the schedule and pace of the tax appeal, why can't the Department make sure it gets the hearing done within six years? Why does it need SB 185 to keep the clock from starting for the six years until the hearing is over and the Department issues its formal decision? And if the Department does somehow find it needs more than six years to get done with a tax appeal, why doesn't it just ask taxpayers for an extension of the six-year period? The second point I'd like to make about Sections 2 and 3 is that they are limited only to certain oil and gas taxes - namely, the separate-accounting income tax that was repealed in 1981, and the production tax. It's not a very friendly message that the State is sending to the petroleum industry if it changes the rules of the game just for us and no one else. In fact, it's one more bit of Alaska's competitive edge that would be thrown away. Why do this and invite at the same time litigation over whether it's constitutional to discriminate this way against one group of taxpayers. Now I would like to discuss the retroactivity of SB 185, which is in Section 4 of the bill. Not only are the proposed changes to the statutes of limitation bad policy on a prospective basis, but Section 4 would make them retroactive by more than 18 years to the beginning of 1976. There are three fundamental problems with this retroactivity. One, there is already litigation pending over the three-year statute of limitations. In fact, the Alaska Supreme Court is due to hear the case on the three-year statute in May. Adopting SB 185 retroactively would interfere in the orderly judicial resolution of the litigation. The courts are, under our constitutional system of government, the arbiter of what the statutes mean. We don't think it is appropriate to change the language of a statute retroactively and certainly not before the courts have had the chance to rule on what it means. The second fundamental problem is that such extreme retroactivity simply goes too far. For some taxpayers, one or both of the statutes of limitations has expired, and they now have certain rights that have vested as a result. To take away those rights retroactively and without compensation as SB 185 would do is, we believe, unconstitutional. Number 102 The third fundamental problem with retroactivity relates to wise tax policy. Suppose the courts ultimately decide it is within Alaska's constitutional powers to reach back more than 18 years and change the rules of the game. Is this the stability that invites people to invest in Alaska? No, it isn't. For if the State can do it to oil companies, nothing will keep it from being able to de it legally to miners, fishermen, timber interest, investors in a Gas Pipeline, or the general public at large. Not only will SB 185 cast a pall over the oil industry here, but over all private sectors of the state economy. Don't cripple Alaska's future through a misguided attempt to change the past. Before I close, I need to correct the record on a number of statements in the findings and purposes of Section 1 that are inaccurate, incomplete or simply untrue. First, on lines 6 and 7 of page 1, the finding asserts that the Department has taken a certain position, described in the next three lines, in the context of the separate-accounting income tax under former AS 43.21 and the production tax under AS 43.55. This is incomplete. We believe the department also takes this position on the income tax under AS 43.20, and may also take it for other taxes that we are unfamiliar with. We fail to see why the findings on this point, if true, should be limited to just the two oil and gas taxes. Second, on line 11 of page 1, the finding asserts that the Department's interpretation of AS 43.05.260 is correct. This is either false or misleading. The Superior Court has ruled that the Department's interpretation of AS 43.05.260 is incorrect. While the Department's appeal of that decision to the Alaska Supreme Court is still pending, the current law if the case is that the Department is wrong. Third, on lines 12-14 of page 1, the finding asserts that this is a clarification. In last year's hearing, ATTORNEY GENERAL COLE testified that while working on tax claims and assessments, he found 'corrections' that needed to be made to procedural tax statutes, procedures and regulations to 'balance the scales' as he put it. Corrections are not clarifications. The finding also asserts that the Department's position is a 'long-standing administrative interpretation' justifying the retroactivity of SB 185 to the date of enactment of AS 43.05.260, the three-year statute of limitations. It is simply not true that the Department's position is long- standing. It apparently dates back no earlier than May 1989 and certainly does not date back anywhere near to the 1976 enactment date of the statute. Let me give you the facts to prove this. Number 154 Under AS 43.21 taxpayers filed their tax returns no later than April 15 of the year following their tax year, and the Department issued tax assessments based on those returns no later than August 15, 1979 and each year thereafter while as AS 43.21 was in effect all said that the assessed amount of tax 'may change as the result of any audit findings within the three years of the date of this notice of assessment.' The regulation also said, 'Returns and assessments under this section are subject to amendment for three years from the date of the original notice of assessment.' 15 AAC 21.700(e). In other words, the Department's own assessment notices as well as its regulations said that the separate-accounting tax assessment for the 1978 tax year, for example, was subject to amendment until August 15, 1982 - the third anniversary of the August 15, 1979 tax assessment for the 1978 tax year. This is not consistent with the position that the Department may amend an assessment 'at any time during the administrative consideration of an appeal[.]' And so any long-standing position on the three-year certainly doesn't relate back to the 1978-81 period when the Department was actively administering the tax. Further evidence that the Department's position is of a much more recent date comes from a letter sent by the department to oil and gas taxpayers seeking their comments to help the Department formulate a position as to the proper interpretation of the three- year statute. The letter, dated March 25, 1988, said, 'Your participation is invited in order to assist the Commissioner in focusing on the broader implications of various possible rulings on the statute of limitations.' There were 'various possible rulings' still open at that time, or the Department would not have asked taxpayers for their input. And if there were 'various' rulings still open, that implies that no ruling or position had yet been formally taken. Number 192 The Department explicitly confirmed that it had taken no formal position on the three-year statute of limitations in 1987 and 2988 in the course of litigation by Standard Alaska Production Company. In 1985 auditors in the Department had issued a new tax assessment for separate accounting for the 1978 tax year, which was already the subject of appeal by Standard for an earlier assessment for that year. The new assessment was after the three-year period had expired, but the auditor asserted that the three-year statute didn't bar them from issuing the new assessment so long as the appeal of the earlier one was still within the Department. Standard sued in March 1987 for declaratory judgement, asking the court to rule on the question whether the three-year statute barred the new assessment or not. The Attorney General, acting on behalf of the Department, argued to the courts that they should not hear Standard's case before Standard had completed its appeal before the department. The Alaska Supreme Court summarized these arguments as follows: The Department moved to dismiss Standard's complaint on the ground that Standard 'had not yet exhausted its administrative remedies.' It argued that no official Department view as to Standard's limitations claims had yet been formulated ... The case is Standard Alaska Production Co. v. Dept. of Revenue, decided April 21, 1989 and reported in Volume 773 of the Second Series of the Pacific Reporter, beginning at page 201. The quotation appears on page 204. So unless the Department was misrepresenting the situation to the courts in that case, it had not yet formulated an official view about the three-year statute of limitations as late as 1988 when the case was being briefed and argued before the Alaska Supreme Court. In fact, if the Department had formulated an official position while the Court's decision was pending, it had a duty to disclose that material development to the Court. So one may presume from the Department's silence that it still did not have a formal position on the three-year statute of limitations as late as April 21, 1989, when the Alaska Supreme Court issued its decision in Standard. The first time that the Department formally took a position was indeed a few weeks after the Supreme Court decided the Standard case. On May 26, 1989, the Department issued its formal hearing decision in Exxon's appeal over separate-accounting for its 1978 tax year. In the Exxon decision, the Department formally took the e position the three-year statute does not bar it from issuing a new assessment for additional taxes while the tax period is under appeal before the Department for an earlier assessment. Thus, contrary to the 'findings' in SB 185, the Department did not adopt its interpretation of the three-year statute until May 1989. Perhaps a little less than five years is long enough to justify going back over 13 years earlier to amend the statute on the basis of the 'long standing' position. Number 245 A fourth inaccuracy in the findings appears in lines 8-9 on page 2 of SB 185. It says the Department's audit has been so lengthily because its ability to audit the separate-accounting and production taxes 'throughout the 1970's and 1980's ... was constrained by its audit resources[.]' In one sense that statement is true because any limit on the resources available could theoretically operate as as a constraint. But the statement is misleading because it implies that the constraint was material and kept the Department from acting faster. In fact, however, the public record shows that, in every Session of the Legislature since North Slope production began, the Department had received virtually every dollar they asked for in the governor's budget proposals for oil and gas audits. The Attorney General has informed the Legislature that the State of Alaska has spent over 176 million in outside legal fees and costs for litigation involving oil and gas royalty and tax issues since 1977. As finding (a)(7) on lines 2-3 on page 3 of the bill indicates, all of the disputes in the production tax and by far the largest disputes in separate-accounting are over the value at the point of production of oil and gas, which was the key issue in the North Slope royalty litigation as well. Surely the Department shared in and benefitted from the fruits of this massive investment. Any 'constraint' on the Department therefore was at such a high level that it is almost absurd to call it a constraint at all. A fifth misleading 'finding' in SB 185 appears on lines 10-14 on page 2. The finding says the length of these tax audits was caused in part by 'taxpayers requested suspension of action on assessments pending the outcome of a challenge to the constitutionality of the separate accounting method[.]' It is true taxpayers asked for suspension of action on their separate-accounting assessments, but the fact is the Department did not stop auditing taxpayers nor did it suspend action on the assessments. Standard Alaska Production Company, for example, was issued assessments in 1981, 1984 and 1985 for separate-accounting for the 1979 and 1980 tax years; and it received an assessment in 1986 for production tax for the months from January 1979 through December 1982. Exxon also had similar experiences during this period. This was all while the litigation was pending. Contrary to what the findings says, the taxpayers' requests for action to be suspended did not slow the Department down at all. A sixth erroneous finding appears in lines 18-20 on page 2 of SB 185, which says that the proposed changes to the six-year statute of limitations 'embodies the interpretation by and practice of the Department of Revenue since the enactment of AS.05.270' in 1976. The fact is the Department has never had any such interpretation or practice, or it did, it never told any taxpayers about it. Unlike the separate-accounting tax regulations, for example, - which specifically say the assessment is open it audit adjustment for three years from the date of the original assessment - there is not now and has never been any regulation at all by the Department about the fix-year statute. None for separate-accounting, none for production tax, none for any other specific tax, and none for taxes generally. If you think about it for a moment, this lack of regulations isn't surprising. As I explained before, the Department controls the pace of tax appeals pending before it. So it is well within the Department's own control to make sure it issues its formal decisions in tax appeals within the six-month period. The six-year period should never be a problem if the Department is doing its job. Moreover, the statute says the six-year period can be extended by agreement with the taxpayer. Throughout the 1980s taxpayers in the oil and gas area regularly agreed to extend the three-year statute of limitations when the Department asked them to. There is no reason to think they wouldn't do the same with the six year statute. But the Department never asked any of us to extend the six-year statute. Only after the Department found that the six year period had run out for some taxpayers and it had forgotten or otherwise failed to seek an extension of that period from them, did the Department decide it needed to have an interpretation or practice regarding g the six-year statute. This finding is a complete fabrication, especially to the extent it purports to justify making the changes to the six-year statute retroactive to 1976. A seventh inaccurate finding appears in lines 21-30 on page 2 of the bill. It asserts that 'often a tax levy cannot be made or a proceeding in court cannot be initiated' because the appeal of a tax assessment 'begins a process that often takes several years to complete[.]' and because judicial resolution of the tax appeal 'often lasts several more years' after the Department's final decision, and because starting a separate action in addition to the tax appeal 'is impractical and inefficient use of ... resources[.]' The administrative appeal of a tax assessment may take several years but that shouldn't be six years. Number 305 As I just said, the Department controls the schedule for tax appeals before they go to court. Moreover, the fact that court appeals of a tax assessment may last several more years is irrelevant. When the tax appeal finally gets into court, that makes the beginning of a court proceeding under which any additional tax that is owed can be collected. The tax appeal statute, AS 43.05.240(d) says, 'If after the appeal is heard it appears that the tax was correct, the court shall confirm the tax. In incorrect, the court shall determine the amount of tax ...' It would be silly if the courts, having made these determinations, said they could not force the taxpayer to pay the tax. We believe the court proceeding to hear the taxpayer is indeed a proceeding in n court under which the tax can be collected, which satisfies the requirements of AS 43.05.270. In other words, if the tax appeal makes it to court within six years of the assessment, the requirements of AS 43.05.270 are satisfied and the Department will be able to collect the correct amount of tax in the course of that judicial appeal. No second court action is needed after the courts decide the tax appeal, and so it is irrelevant how long the courts take to hear that appeal. Thus, these factors cited in the finding do not support the conclusion that a court proceeding cannot be initiated within the six-year limitations period. An eighth erroneous statement appears in lines 9-10 on page 3 in the purposes subsection of Section 1 of the bill. It says the purpose of this legislation is 'to validate and affirm the long- standing administrative interpretation and practices of the Department of Revenue[.]' As I have shown earlier, the Department did not adopt its present view of the three-year statute until May 26, 1989 when it issued its decision in Exxon's separate-accounting appeal. And in fact as late as April 21, 1989 the Department, by its silence to the Alaska Supreme Court in the Standard case, implicitly denying that it had yet adopted an official view on this statute. And as I have also shown, it never had any position on the six-year statute until it found itself in trouble two or three years ago with this statute. therefore, it is wrong to say that the purpose of this legislation is to validate and affirm long- standing positions when they are not long-standing at all. Finally, I would draw your attention to one more inaccuracy in the bill, in lines 11-14 on page 3 in the purposes subsection of Section 1. The bill says one of its purposes is 'to resolve the inconsistent decisions' in the Tesoro Case and the Exxon Case. The Tesoro Case involves the three-year statute regarding tax assessments. With different statutes, there is no way the case could be inconsistent. And even if they were inconsistent, neither er judge's decision sets any precedent that binds any other judge. In civil cases only the Alaska Supreme Court sets binding precedent. So in due course the Alaska Supreme Court would reconcile whatever the inconsistency might have been. But, as it turns out, the State has settled the Tesoro Case, so there is nothing from that case that could cause an inconsistency with the Exxon Case. I have gone on at some length rebutting the inaccurate, misleading or even false statements in the findings and purposes section of the bill because it is a very serious thing to play fast and loose with the truth as part of the justification for legislation. As recited in the findings and purposes, the major justifications for this legislation, and particularly its retroactivity, turn out to be untrue. Number 352 I believe the sponsors of this legislation are well-meaning and justifiably interested and concerned about the lengthy tax appeals that are going on. Unfortunately, their good intentions and sincere desire to improve the situation have not been well served by the parties who asked them to introduce this bill. The sponsors relied on those other parties to prepare accurate justifications for the bill. those other parties did not do so. Instead, in drafting the findings and purposes of this bill, those parties indulged in the hyperbole and exaggeration that are common in legal advocacy before a court or administrative tribunal. Legislation is the solemn exercise of sovereign power by the People's elected representatives. It is not the place for exaggeration and hyperbole. SB185 is a piece of bad legislation, but the findings and purposes that are offered to justify it are a travesty and an abuse against this Legislature. In summary, SB 185 represents bad tax policy. The proposed change to the three-year statute of limitations would put taxpayers in jeopardy of increased tax claims at any time while their appeals are still before the Department. With the proposed change to the six-year statute, there would be no time limits on the Department for processing tax appeals, and the present system of litigating tax disputes that are 10, 15 or more years old with be perpetuated. But even more de-stabilizing, these changes would be made retroactively by more than 18 years. And finally, SB 185 singles out just one industry - oil and gas - for these changes. All this sends a very hostile message about Alaska not only to the managements of the companies who are already here, but also to those who might be thinking about investing in Alaska. On behalf of AOGA and its Tax Committee, I urge you to reject SB 185. Thank you." (This ended MR. HOUSEHOLDER'S formal testimony.) SENATOR KELLY asked for any questions of MR. HOUSEHOLDER. REPRESENTATIVE NAVARRE - "In part of your testimony, you say the Department constantly goes back and gets new advice from outside counsels and lawyers in order to assess more taxes. Does the industry ever use attorneys or outside counsel, or otherwise, to try to reduce their tax burden?" MR. HOUSEHOLDER - "They certainly use attorneys and accountants to protest the assessments they get, and they certainly use attorneys and accountants in all of their tax matters, that is not in dispute." REPRESENTATIVE NAVARRE - "I am trying to determine what is legitimately owed to the State. I don't want to change the taxes or send the wrong message, but tax stability has been an issue ever since I have been in the legislature. Under the tax structure and the constitution, and our responsibility as legislators, every single legislature has the responsibility to determine what is in the best interest in the State. The members of the legislature are changing and so will the way they look at and the way they interpret what is in the best interest of the State. That's our responsibility. To assume that we would not change anything simply for stability would be to say we could never change license fees, or anything, because some previous legislature determined the best way to do it. I don't want to change the tax system just to ding taxpayers, I want to do what is in the best interest of the State, and I think that is what the interest of the committee and the legislature is, in order to find out what is in the best interest of people of the e State, and what is legitimately owing, and how we get to some way to determine based on our statutes and what is owed to the State. What we should be legitimately getting, and what we shouldn't, and if the statute of limitations question is being used ... as a way of trying to get out of a legitimate obligation to the State, then we ought to go back and try to do everything we can to shore up the State's case. If it is just being used in order to go back and try to ding the companies for something they didn't owe us, it is not legitimate. That's what we are trying to sort out." MR. HOUSEHOLDER - "I believe prior legislatures passed the provisions that we are talking about here, in the best interest of the State, that you have procedural rules that the administrations are to follow, so that you have a sound tax system that will allow companies to come in and invest in Alaska, which they did. Now the administration is asking you to go back and change what that former legislature thought was a good rule, in order to correct for, in one case, mistakes they've by letting the six-year period lapse - when they could have just asked us for a waiver - and they didn't. They always asked us for waivers for the three-year statutes, so the fact that they didn't ask on the six-year six is, in effect, just a mistake. On the three year assessments, there should be a finality to taxes, and in some cases, some taxpayers are done. In Unocal's case, we've settled some things or had other years closed out. Other taxpayers might be open for that same period, and it tomorrow, people in Darrel's organization find some new issues, those people that are still in appeals, will have those new issues raised, but those won't come against Unocal. And, that's just the way the tax administration works in the whole world. It works by statutes of limitations, so that you are not open indefinitely. If you were always open indefinitely, you could change the amount of tax, or the rate of tax, or a substantive law provision, and nobody would invest in Alaska." Number 425 REPRESENTATIVE NAVARRE - "The legislature, probably at the time of attempting to get more sophisticated about how we assessed taxes and how we determined the value oil, ... we probably should have suspended all of the statues of limitations at that time, until litigation was finished, which helped us to learn how determine that value. That is what would have been in the best interest of the State, because absent that, how do we really determine what was legitimately owed to the State." MR. HOUSEHOLDER - "I don't know how long it takes. Unocal extended its statute of limitations; we just got assessment last year for 1986, that's a long time ago. I don't think it takes that long to figure it out." SENATOR SALO - "You state in your testimony that the State is in total control of the time line. Yet, when I asked that question awhile ago, who shares the blame for things that drag on ... do you really believe that the taxpayer shares none of the blame for these cases dragging on?" MR. HOUSEHOLDER - "No, I think that with hindsight, it might have been better for some of the taxpayers just to refuse to extend, and hope that the State would move these things along, but in effect, every time somebody did that, they got hit with these penalties or told they would be given a big assessment, and so they were afraid. They let it drag along, because of this fear, but with hindsight, maybe we shouldn't have done that." SENATOR LINCOLN - "I have a number of questions, we will have our attorney general's office respond to a number of questions you have raised, either at some other meeting or in written response. You have now, two or three times, alluded to the extended period of time that could go on by mutual agreement, but is that more of a gentleperson's agreement?" MR. HOUSEHOLDER - "No, these were written contracts. Every six months I would be asked by the auditor to extend the statute of limitations under the three-year assessment." SENATOR LINCOLN - "But, if one party does not agree to it?" MR. HOUSEHOLDER - "They both have to agree." SENATOR LINCOLN - "And also, you said a couple of times, that SB 185 would take away Alaska's current edge. What is our current edge?" Number 457 MR. HOUSEHOLDER - "Well, I think companies like to invest in domestic opportunities, and Alaska has some good opportunities, but companies such as Unocal ... see a lot of opportunities outside the U.S. and other parts of the United States, in the Gulf of Mexico, and we have to place our dollars where we think they will result in the best return. And I can tell you that these big assessments we got last year, did not help Alaska in its edge on those kind of decisions." SENATOR LINCOLN - "The other point I want to make ... when you say, 'It will allow the tax audits to drag on while the Department and its outside consultants try to invent new ways of viewing the past.' I can't imagine why, with the 60 legislative individuals and the administration beating the doors, on earth a Department would want to drag on cases in court when we, as 60 individuals representing the people of the State, are saying we need to resolve these issues. We need to resolve the litigations on the table now. I can't believe that we intentionally would want to see cases drag on, if it would not be to anyone's benefit." MR. HOUSEHOLDER - "It might be to their benefit. They don't have a job when they are done." There being no further questions, SENATOR KELLY apologized to those who were unable to testify: NORMA CALVERT of Marathon Oil, HUGH MALONE and JOHN SACKETT representing themselves, JOHN RINGSTAD representing BP, WALT FURNACE representing the Alliance, JOHN BINKLEY representing himself, BECKY GAY representing the Resource Development Council, and GEORGE FINDLEY representing ARCO. SENATOR KELLY promised a further hearing as time permitted.
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