Legislature(2003 - 2004)

05/03/2004 04:30 PM L&C

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
SB 389-CORP. CONVERSION TO LIMITED LIABILITY CO.                                                                              
                                                                                                                                
CHAIR ANDERSON  announced that the  next order of  business would                                                               
be SENATE  BILL NO. 389,  "An Act  relating to the  conversion of                                                               
certain   corporations  to   limited  liability   companies;  and                                                               
providing for an effective date."                                                                                               
                                                                                                                                
Number 1978                                                                                                                     
                                                                                                                                
JANE  ALBERTS,   Staff  to  Senator   Con  Bunde,   Alaska  State                                                               
Legislature, presented  SB 389  as committee  aide to  the Senate                                                               
Labor  and  Commerce  Committee,  sponsor   of  the  bill.    She                                                               
explained that the bill was  introduced at the request of several                                                               
Alaska Native Corporations (ANCs).                                                                                              
                                                                                                                                
Number 2005                                                                                                                     
                                                                                                                                
MARK  HICKEY, Lobbyist,  Aleut Enterprise  Corporation, explained                                                               
that the bill is a housekeeping  measure and that a number of the                                                               
ANCs  support it.   He  said it  makes one  change.   Current law                                                               
allows  a  number of  business  entities  to convert  from  their                                                               
status  as a  business  entity  to that  of  a limited  liability                                                               
company.   Current  law  does not  include  corporations in  that                                                               
list,  and  the  bill  would   allow  a  corporation  that  is  a                                                               
subsidiary  to be  converted, which  ensures no  tax loss  to the                                                               
state, he  related.  He stated  that there is a  zero fiscal note                                                               
from  the  Department of  Revenue.    The  change could  be  done                                                               
without  this bill,  but it  would  be much  more cumbersome,  he                                                               
said.   He pointed out that  there are letters of  support in the                                                               
members' packets.                                                                                                               
                                                                                                                                
REPRESENTATIVE ROKEBERG  asked if Title  10 is applicable  to all                                                               
corporations or just to ANCs.                                                                                                   
                                                                                                                                
MR.  HICKEY  said, "All  corporations."    He  noted that  it  is                                                               
especially applicable  to regional  corporations, but  the change                                                               
is  applicable  to  any  corporation  in  the  state  that  is  a                                                               
subsidiary.                                                                                                                     
                                                                                                                                
REPRESENTATIVE  ROKEBERG asked  if there  is a  witness from  the                                                               
Department of Revenue.                                                                                                          
                                                                                                                                
Number 2145                                                                                                                     
                                                                                                                                
CHUCK   HARLAMERT,  Juneau   Section  Chief,   Tax  Division   of                                                               
Administrative  Services,   Department  of   Revenue,  introduced                                                               
himself.                                                                                                                        
                                                                                                                                
REPRESENTATIVE  ROKEBERG   asked  if  a  C-type   corporation  is                                                               
currently  able  to make  a  conversion  to a  limited  liability                                                               
company (LLC).                                                                                                                  
                                                                                                                                
MR. HARLAMERT replied that a  business could certainly reorganize                                                               
and become an LLC, but state law  does not allow it to change its                                                               
status from a corporation to an LLC.                                                                                            
                                                                                                                                
REPRESENTATIVE ROKEBERG asked if that is what the bill does.                                                                    
                                                                                                                                
MR. HARLAMERT replied that from his understanding, it does.                                                                     
                                                                                                                                
REPRESENTATIVE ROKEBERG asked how it happens.                                                                                   
                                                                                                                                
MR. HARLAMERT said he assumes  that the company hires an attorney                                                               
to file [the new status] with the Department of Commerce.                                                                       
                                                                                                                                
Number 2208                                                                                                                     
                                                                                                                                
MR.  HICKEY referred  to  page 1,  lines 9-13,  [of  SB 389]  and                                                               
pointed  out that  that is  existing law,  which is  the list  in                                                               
Title 10 that  allows for a conversion  to a LLC.   Adding in the                                                               
change on the  top of page 2 would allow  corporations that are a                                                               
subsidiary  to  have  the  authority  to convert  to  a  LLC,  he                                                               
explained.  The Department of  Law and The Department of Economic                                                               
and Community Development helped to draft this change, he said.                                                                 
                                                                                                                                
REPRESENTATIVE  ROKEBERG  asked  if  it is  [subsection]  (j)  or                                                               
[subsection] (l).                                                                                                               
                                                                                                                                
MR. HICKEY said [subsection] (j).                                                                                               
                                                                                                                                
REPRESENTATIVE ROKEBERG said  it is only for  subsidiaries and is                                                               
not  a   "free  pass"  for   C-corporations  to  make   a  direct                                                               
conversion.                                                                                                                     
                                                                                                                                
CHAIR ANDERSON  said that  in the [Tax  Division] fiscal  note it                                                               
says:                                                                                                                           
                                                                                                                                
     Pursuant  to   federal  income   tax  law,   a  limited                                                                    
     liability  company ("LLC")  is  an entity  that is  not                                                                    
     automatically  classified   as  a  corporation.     The                                                                    
     default  classification   of  a   multimember  business                                                                    
     entity organized  as an  LLC is  a partnership  and the                                                                    
     default  classification  of  a single  member  business                                                                    
     entity  organized as  an LLC  is  a disregarded  entity                                                                    
     where the owner is the  taxpayer.  The LLC may instead,                                                                    
     however, elect to be taxed  as a corporation in lieu of                                                                    
     a default classification.                                                                                                  
                                                                                                                                
REPRESENTATIVE  ROKEBERG  stated that  public  policy  is to  not                                                               
allow for a very quick conversion  from a C-corporation to an LLC                                                               
for tax reasons.                                                                                                                
                                                                                                                                
CHAIR ANDERSON said that is why  he read the fiscal note into the                                                               
record.  He  continued to read, "An LLC taxable  as a corporation                                                               
for  federal  income  tax  purposes  is  subject  to  the  Alaska                                                               
Corporation  Net Income  Tax  in  the same  manner  as any  other                                                               
corporation."  He  asked how the fear of changing  status for tax                                                               
reasons might be quelled.                                                                                                       
                                                                                                                                
Number 2302                                                                                                                     
                                                                                                                                
MR. HICKEY  said the  question also  came up  on the  other side.                                                               
"The tax  consequence at the  state level is zero.   We pay  - in                                                               
our  case we're  consolidated with  the parent  - we  pay at  the                                                               
parent ...  level which has  the obligation for  corporate income                                                               
tax based on earnings," he said.   The desire to become an LLC is                                                               
not a tax  issue, but is because  it is cheaper to  operate and a                                                               
full board will  not be required.  "It's also  a governance issue                                                               
-  the SBA  (Small Business  Association) rules  required a  fair                                                               
amount of arm's  length arrangement with the  subsidiary board so                                                               
we could  not, in the  past, have  members from our  parent board                                                               
sit  on the  board of  subsidiaries," he  explained.   "This will                                                               
give us tighter control," he said.                                                                                              
                                                                                                                                
TAPE 04-50, SIDE B                                                                                                            
Number 2327                                                                                                                     
                                                                                                                                
MR. HICKEY  continued to say that  the bill was designed  so that                                                               
there is no state tax consequence,  which would not have been the                                                               
case if the bill had been broadened to just "corporations".                                                                     
                                                                                                                                
REPRESENTATIVE  ROKEBERG said  he assumes  one reason  Mr. Hickey                                                               
would  like to  make  this  change is  if  he  has joint  venture                                                               
operations then  it would  be easier  to form under  an LLC.   He                                                               
asked if that is correct.                                                                                                       
                                                                                                                                
MR. HICKEY replied,  "Well, we want to protect the  ability to do                                                               
joint venture  and that's why it's  by one or more  parent corps.                                                               
But the tax consequence with that  case will, based on your level                                                               
of ownership,  will accrue with  each corporation, so we  have 80                                                               
percent ownership, we'll have 80 percent."                                                                                      
                                                                                                                                
REPRESENTATIVE  ROKEBERG said  the point  he was  getting to  is,                                                               
"You're  actually not  going to  really be  doing that  as a  tax                                                               
avoidance method  for Alaska  corporate taxes  because ultimately                                                               
you'd  have  to  return  your  net profits  back  to  the  parent                                                               
corporation at  which time there'd  be a tax  ...."  He  asked if                                                               
that is correct.                                                                                                                
                                                                                                                                
                                                                                                                                
Number 2288                                                                                                                     
                                                                                                                                
MR.  HARLAMERT replied  that  the  LLC is  a  non-entity for  tax                                                               
purposes.   It's either going to  be treated as a  partnership or                                                               
the income  goes to the owners  as it's earned and  it's taxed as                                                               
it's earned.                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROKEBERG  asked if a class  C-corporation could be                                                               
an owner of an LLC.                                                                                                             
                                                                                                                                
MR. HARLAMERT  replied absolutely.   They  could still  elect tax                                                               
treatment of that LLC as a  partnership where they pay the tax on                                                               
the  income as  it's earned,  or to  treat it  as a  corporation.                                                               
Generally,  it would  be consolidated,  and the  same result,  he                                                               
added.                                                                                                                          
                                                                                                                                
Number 2250                                                                                                                     
                                                                                                                                
REPRESENTATIVE LYNN moved to report  SB 389, Version 23-LS1923\D,                                                               
out  of   committee  with  individual  recommendations   and  the                                                               
accompanying fiscal notes.  There  being no objection, SB 389 was                                                               
reported from the House Labor and Commerce Standing Committee.                                                                  
                                                                                                                                

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