Legislature(1999 - 2000)
02/08/2000 10:08 AM House O&G
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
February 8, 2000
10:08 a.m.
MEMBERS PRESENT
Representative Jim Whitaker, Chairman
Representative Fred Dyson
Representative Gail Phillips
Representative Joe Green
Representative John Harris
Representative Brian Porter
Representative Allen Kemplen
Representative Tom Brice
Representative Hal Smalley
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
IRS Ruling on Alaska Gasline Port Authority
PREVIOUS ACTION
No previous action to record
WITNESS REGISTER
WILLIAM M. WALKER, General Counsel
Alaska Gasline Port Authority
Walker, Walker, Wendlandt and Osowski
550 West Seventh Avenue, Suite 1850
Anchorage, Alaska 99501
POSITION STATEMENT: Provided information on IRS ruling.
TRAVIS C. GIBBS, Attorney
O'Melveny and Myers LLP
400 South Hope Street
Los Angeles, California 90071-2899
POSITION STATEMENT: Provided information on IRS ruling.
ACTION NARRATIVE
TAPE 00-10, SIDE A
Number 0001
CHAIRMAN JIM WHITAKER called the House Special Committee on Oil
and Gas meeting to order at 10:08 a.m. Members present at the
call to order were Representatives Whitaker, Green, Harris,
Porter, Kemplen, Brice and Smalley. Representatives Dyson and
Phillips arrived as the meeting was in progress.
CHAIRMAN WHITAKER announced that the purpose of the meeting was
to clear the air and remove any questions about the effect and
validity of a recent ruling from the Internal Revenue Service
(IRS) in response to a request from the Alaska Gasline Port
Authority. He introduced William Walker who would testify by
teleconference from Anchorage.
Number 0115
WILLIAM M. WALKER, General Counsel, Alaska Gasline Port
Authority,
Walker, Walker, Wendlandt and Osowski, explained that the port
authority in April 1999 had asked the law firm of O'Melveny and
Myers to assist in obtaining a ruling from the IRS regarding
whether port authority income would be exempt from federal income
tax. That request was submitted to the IRS in November 1999. On
January 28, 2000, the port authority received word that the IRS
had granted the port authority's request for tax exemption. Mr.
Walker then introduced Travis Gibbs as the person who had
prepared and submitted the application. Mr. Gibbs participated
by teleconference from Los Angeles.
Number 0216
TRAVIS C. GIBBS, Attorney, O'Melveny and Myers LLP (Los Angeles),
explained that the port authority's request was based on a long-
held position of both the IRS and the courts that political
subdivisions are not subject to federal tax. As far as the IRS
is concerned, that position is based on either a constitutional
or an implied statutory tax immunity. From the courts'
perspective, that position is based on a Supreme Court decision
that a political subdivision is not subject to tax unless
Congress specifically directs otherwise. Mr. Gibbs said the only
congressional exception of which he was aware applies
specifically to state universities, making them subject to taxes
comparable to those paid by private nonprofit universities.
MR. GIBBS said the port authority's request focused solely on
whether or not the port authority is a political subdivision.
The IRS concluded that based on the definition of political
subdivision contained in IRS regulations, the port authority is,
indeed, a political subdivision. Mr. Gibbs said the effect of
that ruling is that the port authority is not subject to filing
income tax returns or paying federal taxes. The ruling is in the
form of what is called a private letter, which is submitted to
the taxpayer or entity that requested the ruling. Under federal
law, the ruling is applicable only to the entity that requested
it. That entity can rely on that ruling.
Number 0768
CHAIRMAN WHITAKER read what the port authority had sent to the
IRS requesting a ruling that, "The authority is a political
subdivision of the state whose income is exempt from federal
tax."
MR. GIBBS said that was the only question asked.
CHAIRMAN WHITAKER wanted to know if the ruling specifically
stated that port authority income would be exempt from federal
income tax.
MR. GIBBS said that was correct. In response to a request to
quote the answer received, he stated: "Based solely on the
representations made and the definition of the term political
subdivision in Section 1.103-1B [of the federal income tax code],
we conclude that the authority is a political subdivision." Mr.
Gibbs said that means the port authority would pay no income tax.
Number 0908
REPRESENTATIVE BRICE asked if the ruling applied to taxes other
than income tax.
MR. GIBBS said the port authority would be exempt from all
federal taxes, but that the ruling does not apply to any taxes
that might be imposed at the state or local level within Alaska.
REPRESENTATIVE GREEN wondered if this response would hold or if
the IRS might reconsider it.
MR. GIBBS characterized the response as typical of the language
used when the IRS rules that a case meets all criteria. He said
that as long as the factual representations made regarding the
port authority are true, the IRS would not revisit the ruling.
REPRESENTATIVE GREEN asked if the IRS might go back and change
what constitutes a political subdivision.
MR. GIBBS replied that he was very comfortable, based on his
knowledge of the rulings process, that the IRS will not go back
and revisit or try to change the result. He said the conclusion
is consistent with literally hundreds of other rulings. The port
authority was advised to get the ruling because some features in
its case were unique and because there is so much at stake. This
ruling is definitive and binding on both the IRS and the port
authority.
REPRESENTATIVE HARRIS understood that the port authority's income
is to be used for governmental services, with a good portion of
it going to the state and the rest to municipalities.
MR. GIBBS said that is correct. Net revenues will be distributed
among municipalities according to a formula set out in the port
authority ordinances. The money is to be used by the state and
municipalities for general governmental purposes.
REPRESENTATIVE HARRIS speculated that the IRS might have ruled
differently if revenue had not been earmarked for basic
governmental service.
MR. GIBBS said one of the legal standards for a political
subdivision is that it be controlled by state and local
governments, and that it otherwise have a public purpose. He
said the port authority attorneys spent a great deal of time
establishing the public purpose of the authority, and had the
revenues gone to something other than general governmental
activities, that would have put more pressure on the question of
whether the port authority serves a public purpose.
Number 1345
REPRESENTATIVE SMALLEY wanted to know if the state's Department
of Revenue had been involved in determining the percentages that
go to the communities and to the state
MR. WALKER said the statute that provides for the creation of
port authorities does not require that funds go anywhere except
to the port authority. This port authority voluntarily
established a sharing arrangement whereby 60 percent would go to
the state and 30 percent to the communities, with 10 percent
retained by the port authority.
CHAIRMAN WHITAKER asked if the authority had discussed the
allocation with the Department of Revenue and/or other state
officials.
MR. WALKER said they did, and that they kept those officials
apprised that the goal of the port authority project was to
benefit all of Alaska.
CHAIRMAN WHITAKER asked Mr. Walker about the impact of the ruling
on the project's bottom line.
MR. WALKER said estimates place the impact somewhere between $2.3
and 3 billion. He explained that the ruling frees money that
would normally be used to pay federal taxes, so that money can be
used elsewhere in the project, thereby making the project more
viable. It raises the rate of return from eight to 12 percent.
CHAIRMAN WHITAKER asked what the ruling means to the port
authority in terms of dollars per year.
MR. WALKER said he would need to calculate that, taking the
annual net revenues of the project and assuming that without the
ruling, about 35 percent of the total would go to federal taxes
each year.
CHAIRMAN WHITAKER said his best estimate was an annual effect on
the bottom line of $250 million to three-fourths of a billion
dollars a year. He added that those are huge numbers.
MR. GIBBS responded that, in his experience, the financial market
takes a ruling like this at face value.
CHAIRMAN WHITAKER wondered why the IRS ruling does not
specifically state that port authority earnings would not be
subject to income tax.
MR. GIBBS said based on recent discussions he has had with the
IRS, the agency did not want to go beyond a decision based
strictly on the regulations. Despite reluctance to include the
specific words related to tax exemption, those who made the
ruling have indicated that they understood its effect would be to
exclude the port authority from any kind of federal taxes. Mr.
Gibbs indicated he had directed attention to other rulings that
include specific reference to income tax exemption, words that
the port authority would like see included in this ruling. He
said that IRS rulings focus on procedural and technical
limitations, and the branch with which he was dealing was of the
impression that procedurally they should not go further. He
expressed hope that the IRS officials involved will agree that
there is no procedural reason why they should not fully spell out
the ruling's effect on taxes.
MR. GIBBS, at Chairman Whitaker's request, repeated the question
asked of the IRS and the IRS conclusion that the port authority
is a political subdivision.
CHAIRMAN WHITAKER asked if the topic of tax-exempt revenue bonds
would be a second issue.
MR. GIBBS replied that the port authority plans to submit a
specific request for a ruling regarding tax exempt bonds when
related plans are more fully fleshed out. He added that the
ruling that the port authority is a governmental subdivision is a
good start in achieving financing for the project, but that there
are other rules and requirements that will have be addressed
before there can be an answer to the question regarding bonds.
Mr. Gibbs clarified for Chairman Whitaker that the port
authority's request had nothing to do with tax exempt bonds, but
related only to income.
REPRESENTATIVE SMALLEY asked if project plans were predicated on
a specific market window.
MR. WALKER said the project is geared toward the 2005 market
window.
REPRESENTATIVE SMALLEY followed by asking if the potential
revenues of $450 million to $3/4 billion are predicated on an
initial seven tons per year or on an expanded 14-20 tons per
year.
MR. WALKER replied that those estimates were based on 15 million
tons per year.
REPRESENTATIVE DYSON inquired if a 12 percent discount rate is
standard for calculating present worth.
MR. WALKER said he did not know, but would find out from the port
authority's financial advisers. Chairman Whitaker recalled that
the percentage could be arbitrarily fixed, and Mr. Walker
confirmed that was the case.
REPRESENTATIVE DYSON wondered if 12 percent would be an
acceptable rate of return to investors in the project.
Number 2017
MR. WALKER stated that on behalf of the port authority, he cannot
over-emphasize the importance of the IRS ruling. The port
authority concept is what makes this project work, and the ruling
is a monumental step that has created tremendous momentum for the
port authority.
CHAIRMAN WHITAKER asked Mr. Walker if the port authority had
discussed with producers or with the state the effect this
definitive ruling has on a potential gas project.
MR. WALKER said the port authority had met previously with
producers and with the state Administration. The port authority
will give all of them a copy of the ruling and discuss its impact
again now that the decision has been made. In response to a
request by Chairman Whitaker, Mr. Walker agreed to keep the
committee apprised of progress and the receptiveness of those
parties. In response to a question from Representative Green,
Mr. Walker said the concept of a port authority being tax-exempt
is not unique, but there had not been a previous inquiry in which
the facts were identical to this one.
MR. GIBBS concurred.
CHAIRMAN WHITAKER adjourned the House Special Committee on Oil
and Gas at 11:47 a.m.
NOTE: The meeting was recorded and handwritten log notes were
taken. A copy of the tape and log notes may be obtained by
contacting the House Records Office at 129 6th Street, Suite 229,
Juneau, Alaska 99801-2197, (907) 465-2214, and after adjournment
of the second session of the Twenty-first Alaska State
Legislature this information may be obtained by contacting the
Legislative Reference Library at 129 6th Street, Suite 102,
Juneau, Alaska 99801, (907) 465-3808.
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