Community Development Quota groups pursue tax break

Posted: Monday, August 09, 2010

Lobbying firms and their employees hired by Community Development Quota groups are breaking out their checkbooks for U.S. Sen. Lisa Murkowski's re-election campaign as the nonprofits push to expand their tax-exempt status to their subsidiaries.

CDQ groups, the six organizations representing 65 Western Alaska villages that have been granted fishing rights in the Bering Sea since 1992 to spur economic development, already have tax-exempt status for the parent organization.

Although all six groups have officially sought the exemption, some representatives of the CDQ groups attempted to distance themselves from the proposal and said the measure is largely being pursued by Bristol Bay Economic Development Corp. and Yukon Delta Fisheries Development Association.

Murkowski's proposal would extend that tax exemption to the revenue produced by the CDQ groups' wholly-owned, for-profit subsidiaries that pay dividends to the parent nonprofits tasked with improving the lives of those in their communities.

Murkowski attached the tax exemption as an amendment, co-sponsored by fellow Alaska Sen. Mark Begich, to the extension of unemployment benefits bill that failed to pass in June.

Murkowski has yet to make a public statement on the tax exemption for CDQ subsidiaries, but her spokesperson, Michael Brumas, confirmed that Murkowski plans to introduce the tax exemption proposal again as a free-standing bill this fall.

Murkowski's office said she introduced the proposal in response to the concerns of the six CDQ groups, who all signed a letter to the Alaska Congressional delegation Jan. 30, 2009, and submitted the proposed legislation.

Although some CDQ groups now say they aren't pushing for the exemption, a follow-up letter to Murkowski and Begich in May 2009 stated that the issue, "supported by all six CDQ groups, is of primary importance to our program and if enacted, will allow us the surety to continue to provide the highest level of economic development to our communities."

Four of the six CDQ groups have spent $135,000 with four lobbying firms during 2010, according to federal disclosures, and lobbyists and political action committees at three of those firms have combined to contribute $36,100 to Murkowski's re-election campaign.

In October 2009, the Joint Committee on Taxation, a nonpartisan group of House and Senate members who evaluate tax implications of proposed laws, estimated that the legislation proposed by Murkowski and Begich would cost the U.S. Treasury between $90 million and $124 million over 10 years.

The range of costs is based on supplemental language proposed by the CDQ groups and submitted by the Alaska senators to the Joint Committee on Taxation that would have not only exempted subsidiaries from taxes, but would have applied the exemption retroactively.

The committee estimated the supplemental language would cost $40 million in the first year and around $10 million per year thereafter.

Robin Samuelsen, Bristol Bay Economic Development Corp. executive director, said the dividends received by the nonprofit CDQ groups from their for-profit subsidiaries are used to further the tax-exempt purpose and should therefore be free of tax liability.

"We're nonprofits," Samuelsen said. "We give out scholarships, we give out training, we do a lot of nontaxable work trying to improve our economic situations out here."

BBEDC is one of the chief proponents of the tax exemption and has paid Ball Janik $40,000 during 2010. The group's lobbyist at Ball Janik since 2007 is Matt Paxton, an aide to former U.S. Sen. Ted Stevens, who created the CDQ program in 1992.

One of the major reasons for the IRS to tax subsidiaries of nonprofits is to promote fair competition. A tax-free CDQ subsidiary, be it a fishing or processing operation, would gain a competitive advantage against its taxable rivals, a fact noted in the Joint Committee on Taxation letter to Begich and Murkowski Oct. 21, 2009:

"It is possible that the entities might expand their newly tax-exempt activities beyond current levels. To the extent that these entities compete with taxable entities, reducing taxable entities' profits, your proposal would indirectly reduce revenue from those taxable entities."

Samuelsen, whose group holds a 50 percent ownership in Ocean Beauty Seafoods among its subsidiaries, dismissed the fairness criticism of an expansion of tax-exempt status for CDQ operations.

"Those who'd argue against us, I'd ask do they do the same?" Samuelsen said. "Or do they just do distributions to a handful of owners? We're accountable to 17 villages and 6,200 people."

Samuelsen complained that BBEDC pays taxes on Ocean Beauty operations outside of Western Alaska, such as Kodiak and Southeast.

Begich spokesperson Julie Hasquet said the senator did not support extending the tax exemption to activities outside of the CDQ regions.

Aleutians Pribilof Islands Community Development Association, or APICDA, has spent $40,000 with lobbying firm Blank Rome in 2010 and $730,000 with the company since 2003.

According to federal campaign disclosures, Blank Rome employees and its PAC have contributed $12,500 to Murkowski's campaign. APIDCA lobbyist C.J. Zane, a former chief of staff to U.S. Rep. Don Young, has contributed $3,950 to Murkowski.

Fellow Blank Rome lobbyist Duncan Smith has contributed another $3,300 to Murkowski. Blank Rome also represents Alaska Railroad Corp., the city of Akutan and the Municipality of Anchorage. Those three clients have paid Blank Rome $60,000 each in 2010.

APICDA executive director Larry Cotter said his CDQ group is not pushing for the tax exemption but signed on out of solidarity with the other five groups. Cotter said the chief legislative priority for APICDA is securing funding to build a harbor on St. George Island, estimated to cost $25 million.

"We are not lobbying for that (tax exemption)," Cotter said. "All we have done is sign the letter and that's it."

APICDA formed its wholly owned, for-profit subsidiary in 1993, and Cotter said the group would not benefit from the legislation. Cotter said APICDA's Joint Ventures subsidiary doesn't have any retroactive tax liabilities after posting losses in past years that have yet to be reported.

The legislation would also allow the parent nonprofit to absorb the for-profit subsidiary to secure its tax-exempt status, something Cotter said APICDA wouldn't do.

"We could, but we're not going to do that," he said. "There's no need for us to do that. We've accumulated significant losses in the past and we still have net operating losses we've yet to carry forward."

In any event, Cotter isn't optimistic about the bill's chances.

"It's going to be a difficult piece of legislation to get through," Cotter said. "It will be a while, if it happens at all."

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