Honorable John Seiberling July 19, 1977 Page Five or the activities they may conduct on, any land conveyed to them under the Settlement Act. b. The position of the Calista Corporation on D2 land issues will be more fully set forth in a separate letter. 4. State and local taxation. The Claims Act will subject the lands held by village and regional corporations to state and local taxation after 1991. In many instances, the Natives selected lands for subsistence purposes and such lands have little productive potential. Subjection of Native lands in the lower 48 to taxation was a chief cause of the loss of millions of acres between 1880 and 1930. The exposure of lands the Natives are to receive under the Claims Act to state and local taxation clearly sets the stage for lands to be taken from them. The tax exemption problems of Native corporations have been examined in a lengthy law review article in Vol. 6 Number 1, Fall 1976, of the UCLA-Alaska Law Review. That article notes at p.2 that the exemption period is unusually short within the tradition of individually held Indian lands. The article further notes that there have been unanticipated delays in the patenting of land to Native corporations which has affected Native land use planning. Proposed solution: Congress should enact legislation permanently exempting lands conveyed to Native corporations under the Claims Act from state and local taxation, so long as they are not developed or leased, so long as they are not productive of income, whether or not they were previously developed or leased. This recommendation is supported by the American Indian Policy Review Commission. 5. Section 7 (i) revenues. The revenue sharing provisions of §7(i)' of the Claims Act has raised many problems of interpretation and implementation, as well as the most protracted and expensive litigation to date. Among the issues which are being litigated are the following: Honorable John Seiberling July 19, 1977 Page Six nues? a. Does the word "revenues" mean net or gross reve b. What constitutes revenues from timber resources and sub-surface estates? C. Are sand and gravel surface or sub-surface resources? d. What is the nature of the legal relationship Congress intended should exist among the regional corporations relative to $7 (i) resources? e. Was it intended that the regional corporations should have an economic interest in 57 (i) resources in place of the title holding corporation? f. How should non-monetary consideration received by a title holding corporation in connection with a disposition of $7 (i) resources be treated? The $7(i) litigation is considered by many attorneys to be potentially the most protracted and expensive litigation to be spawned from the Claims Act. One suit has been pending for over two and one half years, and is projected to run for at least three to five years, all at staggering expense to Alaska Natives. On April 6, 1976, the District Court for the State of Alaska determined that pre-patented revenues were to be included in the sharing provisions of $7 (i). In July, 1976, the same court determined that nonmonetary benefits would be included in the sharing provisions of $7(i), and that those "opted out" Natives enrolled under $19 (b) were to be included in the count to determine the $7 (i) population base. The latest decision of the court, dated October 13, 1976, ruled that Congress intended $7 (i) to require the distribution of net proceeds although no framework for defining that term is set forth and no guidelines for determining deductions were established. Several of the issues decided by the court are presently pending before the United States Court of Appeals for the Ninth Circuit, and will ultimately be before the Supreme Court of the United States at least once. Honorable John Seiberling July 19, 1977 Page Seven As Each day that passes without some resolution of the $7 (i) issues compound and complicate a final resolution. lands are conveyed, contracts are entered into, and money is earned and spent, final resolution becomes more remote. Later remedial actions by Congress may well constitute a taking of a vested property right requiring condemnation or further compensation. Legislative remedy: It is the strong belief of the Calista Corporation that the attention of this committee should not be fragmentally directed toward the resolution of any one of the above mentioned issues or subissues. Rather, if possible, the $7 (i) problem should be the subject of a separate Congressional hearing. Implicit in the solution is the establishment of simple procedures to inexpensively resolve both factual and legal disputes, and to provide a uniform system of accounting. While both compulsory arbitration and the use of special masters has been successfully employed as alternatives to litigation, the committee may well consider the creation of a special agency to administer §7 (i) revenues, as well as regulating $7 (i) transactions between Native corporations and between Native corporations and third parties who desire to develop natural resources. While there is some opposition to a legislative solution to the $7(i) problem, the Calista Corporation would cooperate fully in shaping the framework of a legislative solution to the problem. 6. Improper application of the revenue code. Within the past several months almost all of the Native regional corporations have been audited by the Internal Revenue Service. The Internal Revenue Service has assumed an intransigent position with regard to the application of the Internal Revenue Code to the Alaska Native Claims Settlement Act. What Congress has given, the Internal Revenue Service is attempting to take back. The potential tax liability to the Calista Corporation for fiscal years 1973 and 1974 alone is almost $3 million. The Claims Act is sui generis with goals and purposes vastly differing from those underlying the federal tax laws. Legislative relief is clearly in order. Congress should make express what is already implicit in $26 of the Claims Act, which states that "to the extent that there is a conflict between any provision Honorable John Seiberling July 19, 1977 Page Eight of this act and any other federal laws applicable to Alaska, the provisions of this act shall govern. a. Pre-opening expense. The IRS has disallowed in excess of $825,000. of deductions claimed by the Calista Corporation which have been characterized by the IRS as nondeductible pre-opening expenses. The pre-opening expenses deducted by the taxpayer were for wages and salaries, payroll taxes, travel expenses, per diem, director and staff training, village workshops, telephone and postage, supplies and equipment, and similar matters. These items would normally be deductible under $162 of the Internal Revenue Code if the taxpayer is in a trade or business. The IRS has taken the position that the Calista Corporation is not in a trade or business, and therefore, these items are not deductible as ordinary and necessary business expenses. However, it is abundantly clear that the initial business of the corporation was to implement the Claims Act by organizing the regional and village corporations into profit making corporations. Therefore, these expenses were incurred in a trade or business. Legislative solution: Congress should enact legislation which specifies that all pre-opening expenses incurred during the formative stages of Native corporations shall be deemed to have been incurred in the trade or business under $162 of the Internal Revenue Code. b. Land selection costs. The IRS has disallowed in excess of $1 million of deductions attributed to land selection costs incurred by the Calista Corporation during fiscal years 1973 and 1974. The IRS contends that land selection costs should be capitalized into the value of the land. If land selection costs are capitalized into the value of the land which Native corporations shall hold, the corporations would show a loss for any sale or other disposition of such land sold for fair market value, since the tax basis in the land would be its fair market value plus the pro-rata land selection costs. This result is both unnecessary and contrary to $21(c) of the Claims Act, which states that "the basis for computing gain or loss on subsequent sale or other disposition of such Honorable John Seiberling July 19, 1977 Page Nine land or interest in land for purposes of any federal, state or local tax imposed on or measured by income shall be the fair value of such land or interest in land at the time of receipt." Congress intended that the basis for computing a gain or loss on a sale of land conveyed to Native corporations shall be the fair value at the time of receipt, and not the fair value of such land at the time of receipt after land selection costs have been capitalized into the value of the land. When Congress enacted the Claims Act, its intent was to have Native corporations incorporate for profit. Congress could not have intended to set up a basis for tax purposes in the land to show an immediate loss when the profit oriented corporations began to dispose of their lands. Legislative solution: Congress should enact legislation specifically allowing deductions for the expenses incurred by Native corporations in selecting their lands. C. Another egregious example of the way the IRS has applied the Internal Revenue Code arose when the IRS disallowed a deduction for the expenses of conducting village workshops and education programs to educate villagers in an attempt to prepare these people for the management and control of the various Native corporations. The IRS disallowed this deduction claimed by the regional corporation on the theory that $162 of the Internal Revenue Code does not allow for a taxpayer to claim a deduction for another taxpayer's expense. However, the IRS completely ignores the fact that the Claims Act places a fiduciary duty upon the regional corporation to assist village corporations in preparing Articles of Incorporation and other documents. Further, $8 of the Claims Act requires regional corporations to review village corporation budgets on an annual basis for a period of five years. These expenses of training village personnel were necessarily incurred in the business of implementing the Claims Act, and should have been deductible. Legislative solution: Congress should enact legislation specifically allowing deductions for the expenses incurred in training villagers corporations to assume management and control of their village corporations. Not only should Congress pro 20-169 077 - 26 |