Appendix — Atlantic Richfield Co. v. Alaska

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Supreme Court, U.S,

FILED

Ow" * NOV 13 1968

__} JOSEPH K. SPANIOL, Ji

CLERK

a er

October Term, 1985

ATLANTIC RICHFIELD COMPANY; ARCO PIPE LINE

COMPANY; EXXON CORPORATION; EXXON PIPELINE

COMPANY; BP ALASKA, INC.; SOHIO ALASKA PETRO-

LEUM COMPANY; and SOHIO PIPE LINE COMPANY,

Appellants,

VS.

STATE OF ALASKA, ef al.,

Appellees.

On Appeal From the Supreme Court of Alaska

APPENDIX TO JURISDICTIONAL STATEMENT

WILLIAM B. ROZELL JOHN F. DaumM*

JOHN F. CLouau, III BARTON H. THOMPSON

FAULKNER, BANFIELD, RICHARD B. GOETZ

DOooOGAN & HOLMES O'MELVENY & MYERS

302 Gold Street 400 South Hope Street

Juneau, Alaska 99801 Los Angeles, CA 90071

and (213) 669-6000

J. W. BULLION Counsel for Appellants Exxon

RALPH I. MILLER Corporation and Exxon

THOMPSON & KNIGHT Pipeline Company

3300 First City Center TERRENCE G. PERRIS

Dallas, Texas 75201 WILLIAM H. Lutz

HOWARD J. C. NICOLS

SQUIRE, SANDERS & DEMPSEY

1800 Huntington Building

Cleveland, Ohio 44115

Counsel for Appellants Sohio

Alaska Petroleum Company,

BP Alaska, Inc.; and

Sohie Pipe Line Company

Counsel for Appellants Atlantic

Richfield Company and

Arco Pipe Line Company

*Counsel of Reeord

twhaw —X—e err a a eS er . en

BARRY L. WERTZ

JANICE L. ROBERTSON

EXXON CoMPANY, U.S.A.

800 Bell Avenue

Houston, Texas 77002

and

HARTIG, RHODES, NORMAN,

MAHONEY & EDWARDS

ROBERT J. MAHONEY

717 “K” Street

Anchorage, Alaska 99501

Counsel for Appellants Exxon

Corporation and Exxon

Pipeline Company

RICHARD H. HAHN

THE STANDARD OIL COMPANY

1725 Midland Bldg.

Cleveland, Ohio 44115

Counsel for Appellants Sohio

Alaska Petroleum Company,

BP Alaska Inc., and

Sohio Pipe Line Company,

ROBERT E. MCMANUS

ATLANTIC RICHFIELD COMPANY

P.O. Box 2819

Dallas, Texas 75221

Counsel for Appellants Atlantic

Richfield Company and

Arco Pipe Line Company

TABLE OF CONTENTS

COPIES OF THE DECISION APPEALED

FROM

I. Opinion of the Supreme Court of Alaska,

dated August 16, 1985, affirming the judg-

ment of the court below ...............

Il. Memorandum of Decision and Order

Granting Summary Judgment of the

Superior Court of the State of Alaska,

Third Judicial District, dated May 27,

CR ae ee es Poe ee ae eee

Ill. Order for Final Judgment of the Superior

Court of the State of Alaska, Third Judi-

eiai District, dated July 6, 1983 and effee-

og ee ee

IV. Judgment of the Superior Court of the

State of Alaska, Third Judicial District,

Gate GAT ORO hv kc iawn cape ciun sae

NOTICE OF APPEAL, FILED NOVEMBER

RELEVANT CONSTITUTIONAL PROVI-

SIONS, STATUTES, AND REGULATIONS .

AFFIDAVIT OF SIDNEY DAVIDSON, Filed

SE ie ea a he ee ee eS

Sidney Davidson is Arthur Young Professor of

Aceounting at the University of Chicago and

former Dean of the Graduate School of Busi-

ness. His affidavit shows that generally

accepted accounting principles provide no sup-

port for the Oil Tax Act, and that the effect of

the Act is to diseriminate against interstate

commerce.

Page

45a

4sa

48a

49a

53a

150a

AFFIDAVIT OF PETER MIESZKOWSKI,

Filed July 30, 1982................00.000..

Peter Mieszkowski is Cline Professorrof Eeo-

nomics and Finance at Rice University. His

affidavit shows that Alaska’s tax policies are

not constrained by ordinary political and eco-

nomie considerations, and that Alaska’s expen-

diture levels are consequently disproportionate

to those of all other states.

AFFIDAVIT OF WILLIAM J. BAUMOL,

FOG Sue Fe Se eee eet. :

W. J. Baumol is Professor of Economies at

Prineeton University and New York University

and a former President of the American Eco-

nomie Association. His affidavit shows that it is

unsound, as a matter of hoth economic theory

and practice, to attempt to divide the income of

a multistate business on geographic lines in a

situation where the business enjoys economies

of seale and seope, and that the attempt to do

so will result in duplicative taxation and bur-

dens on the conduct of interstate business.

AFFIDAVIT OF HORACE BROCK, Filed

Saly BO, 3OOR sco poe ese

Horace Brock is Distinguished Professor of

Aeeounting and Director of the Extractive

Industries Accounting Research Institute. His

affidavit demonstrates that exclusive allocation

overattributes ineome to Alaska and is

improper from the point of view of accepted

revenue accounting practices for the oil indus-

try.

216a

253a

ill

SUPPLEMENTAL AFFIDAVIT OF HOR-

ACE BROCK, Filed November 17, 1982 ..... :

In his supplemental affidavit, Mr. Brock demon-

strates that the Oil Tax allows no deduction

from taxable income for any profits attributable

to aetivities outside Alaska.

AFFIDAVIT OF THOMAS W. GILLETTE,

I OM 5 ok kg eas vee eb ow eee

Thomas W. Gillette is a Senior Supply Consult-

ant in the Supply Department of Exxon. His

affidavit shows the interstate structure of

Exxon’s oil production and shows that only a de

minimis amount of the oil Exxon produces in

Alaska is sold in Alaska.

SOHIO FACT SUMMARY, Filed July 30, 1982

This summarizes affidavits submitted to the

Superior Court by Sohio employees, ineluding

affidavits which show that Sohic’s oil produe-

tion is interstate in structure, that the great

majority of its oil sales are outside of Alaska,

and that the Oil Tax allocates to Alaska 100% of

Schio’s oil production income and taxes a dis-

proportionate share of its total income.

29la

329a

AFFIDAVIT OF SCOTT K. TOMPKINS,

eo eS a ra

Seott K. Tompkins is a staff tax accountant in

the Atlantie Richfield Company Tax Depart-

ment. His affidavit shows the degree to which

the Oil Tax subjected Atlantie Richfield Com-

pany to double taxation during all tax years at

issue. In addition, it shows that in all such tax

years, uniform adoption of Alaska’s law would

subject well in exeess of 100% of the income of

Atlantie Richfield Company to tax.

AFFIDAVIT OF OSCAR E. JONES, Filed

ok Sere er rer aan. we

Osear E. Jones is Supervisor of the Income and

Franchise Tax Seetion of the Tax Compliance

Division of Exxon. His affidavit shows the

degree to which the Oil Tax subjected Exxon to

double taxation during all tax years at issue. In

addition, it shows that in all such tax years,

uniform adoption of Alaska’s law would subject

well in excess of 100% of the income of Exxon

to tax.

AFFIDAVIT OF E. WAYNE TANNER, Filed

bee oe ee

E. Wayne Tanner is Manager, Tax Legislative

Affairs in the Accounting Department of Sohio.

His affidavit shows the degree to which the Oil

Tax subjected Sohio to double taxation during

all tax years at issue. In addition, it shows that

in all sueh tax years, uniform adoption of

Alaska’s law would subject well in excess of

100% of the income of Sohio to tax.

Page

. 368a

376a

380a

0).

AFFIDAVIT OF R. F. HEIDNER., Filed July

SO, BOR. ois kee cab eead eee eee

R. F. Heidner is the Manager of the Tax Com-

plianee Division of Exxon. His affidavit

includes a table which sets forth each state

where Exxon filed a tax return and which

required Exxon to include in the income base to

be apportioned income from production of oil in

Alaska.

AFFIDAVIT OF GARY L. JENKINS, Filed

November 37, BGG .o56k 640530052

Gary L. Jenkins was Director of the Division of

Audit in the Alaska Department of Revenue

from December 1974 until July 1981. His affida-

vit shows that in the period 1978-81 Alaska

consistently interpreted its tax laws as requir-

ing that an oil company with producing wells or

pipelines outside Alaska, but not in Alaska,

apportion to Alaska a share of the income from

such wells or pipelines.

Page

406a

408a

FIRST SUPPLEMENTAL AFFIDAVIT OF

ROBERT E. MeMANUS AND SUPPORTING

EXHIBITS, Filed July 13, 1984 ............

Robert E. MeManus is Senior Tax Counsel of

Atlantie Richfield Company. His affidavit and

supporting exhibits show that if Alaska Depart-

ment of Revenue Ruling 82-2, as interpreted by

the Department of Revenue, were applied in

every state, in those states where a taxpayer is

engaged in exploration activities but not in

production or pipeline activities, it would be

subject to apportionment under AS 43.20, but

could not deduct from its apportionable income

its exploration losses.

LIST REQUIRED BY RULE 28.1..........

Page

410a

APPENDIX

A. COPIES OF THE DECISIONS APPEALED FROM

I. Opinion of the Supreme Court of Alaska, dated

August 16, 1985, affirming the judgment of the

Superior Court. f

IN THE SUPREME CoURT

OF THE

STATE OF ALASKA

File No. S-52

OPINION

[No. 2965 — August 16, 1985]

ATLANTIC RICHFIELD COMPANY;

ARCO Pipe LINE COMPANY; BP ALASKA, INC.;

EXXON CORPORATION; EXXON PIPELINE COMPANY;

and SoHIO PIPE LINE COMPANY,

Appellants,

Vv.

STATE OF ALASKA; ALASKA DEPARTMENT OF REVEN'E;

ALASKA DEPARTMENT OF ADMINISTRATION;

COMMISSIONER OF REVENUE ROBERT D. HEATH,

and COMMISSIONER OF ADMINISTRATION LISA RUDD,

Appellees.

Appeal from the Superior Ceurt of State of Alaska,

Third Judicial District, Anchorage,

Victor D. Carlson, Judge.

[List of appearances omitted |

Before: BURKE, C.J., RABINOWITZ, MATTHEWS, and

Moore, JJ. [COMPTON, J., not participating]

OPINION

BURKE, Chief Justice.

This is an appeal brought by several major oil produe-

ing companies in Alaska’ challenging the constitutionality

of the Oil and Gas Corporate Income Tax, Former AS

43.21 (repealed 1982) (“the Oil Tax”).” The issue is

whether the State of Alaska must, as a matter of econstitu-

tional law, use the formula apportionment method to

determine the portion of each corporation's worldwide oil

production and pipeline transportation income that can

be attributed to Alaska. During the tax years 1978 to 1981

the state used separate accounting, instead of formula

apportionment, to determine taxable production and pipe-

line transportation income.

Various actions challenging the constitutionality of the

Oil Tax were consolidated on August 27, 1980, in the

superior court.® Appellants ARCO, Exxon, and Sohio

argued below that the Oil Tax violated the commerce, due

proeess, contract, and equal protection elauses of the

United States Constitution. as well as the equal protec-

tion elause of the Alaska Constitution and the state

constitutional and statutory provisions against retroactiv-

ity. They sought a refund of taxes paid under the Oil Tax.

On November 12, 1981, the state moved for summary

judgment seeking a declaration that the Oil and Gas

‘Atlantie Richfield Company and ARCO Fipeline Company (collee-

tively “ARCO”), Exxon Corporation and Exxon Pipeline Company

(ecolleetively “Exxon”), and BP Alaska, Ine. and Sohio Pipe Line

Company (collectively “Sohio”).

*AS 43.21 (Ch. 110, § 3, SLA 1978; am. eh. 113, §§ 28-32, SLA 1980;

am. ch. 116, §§ 6-11, § 17 SLA 1981) was repealed effective January 1,

1982. Ch. 116, § 19, SLA 1981. For convenience, we refer to the Oil

Tax by the former statutory section numbers throughout this opinion.

See Appendix 1 for the full text of AS 43.21.

'Other oil companies were also involved initially in the litigation,

but were dismissed upon agreeing to defer their constitutional claims

pending resolution of this case.

Corporate Income Tax Act is constitutional. The trial

court rejected the oil companies’ claims of uneonstitution-

ality and granted the state’s motion for summary judg-

ment. We affirm.

I. THE OIL TAX

In 1959, Alaska adopted the three-factor apportionment

formula of the Uniform Division of Income for Tax Pur-

poses Act (UDITPA) to determine the share of income of

an integrated (unitary) interstate business subject to

Alaska income taxation. AS 43.20.130 (repealed 1975).*

The apportionment formula relies on three indicators of

business activity — payroll, property and sales — to com-

pute Alaska’s share of taxable income. Jd. The value of

property, payroll and sales in Alaska is compared to the

value of property, payroll and sales of the corporation

worldwide. The resulting ratio is then multiplied by the

eorporation’s apportionable net income worldwide to ar-

rive at an approximation of Alaska’s share of taxable

income.

Prior to the enactment of the Oil Tax in 19738, all of the

income tax liability of oil companies was determined

under the formula apportionment method. Under the Oil

Tax, a different methodology, separate accounting,’ was

implemented to ealeulate the production and pipeline

transportation income subject to Alaska taxation. The

goal of the separate accounting method was to determine

that portion of the value of a barrel of oil attributable to

*In 1970, Alaska adopted the Multistate Tax Compact, enacted as

AS 43.19.010. It is basically a restatement of UDITPA with a few

minor changes. Tie three-factor apportionment formula is now de-

seribed at AS 43.19.010, art. IV, $§ 9-15.

°*The oil companies dispute whether the methodology of the Oil Tax

is in faet “true” separate accounting. See infra section II. B.

the oil being produeed, i.e., taken from the ground. AS

43.21.020.

The separate accounting of oil production income began

with the determination of gross production revenue or

“gross income.” The Oil Tax defined gross income as the

value of the oil at the point of production, i.e., the

‘The following graph, submitted by the State of Alaska, illustrates

the estimated revenues, costs and profits contained in each barrel of

Alaskan oil during the years 1978-80:

TOTAL Ott COMPANY

umm GROSS REVENUE

Per Se

Retining Costs & Profits $5.72

ee ee

want

ng Transoortation Costs & Profits $7.14—

(pipeune & marine) 7

WELLHEAD PRICE

STATUTORY GROSS

PROOUCTION REVENUE |

——ae $11.78 (44.2%) |

— |

_Povares 5, Ei

( Oduction. Winataii Protit $ $1.92

Ad Valorem Taxes z

Expioration Costs Excensed

Genera Overnead 4

Agmenstratve inci 1981 revisions)

| AS 43 21 TAXABLE

NET PRODUCTION

Sq} come |

| $6.77 (25.4%)

SOURCE Oeasin 26 Supprementa: Attidawt* 1S. A 16917. 16929

Gir 1

wellhead price. AS 43.21.020(b). Essentially, gross in-

come equalled the price at which the oil was sold, or could

be sold, to a refinery less transportation expenses. AS

43.21.020(b). The price at which oil was sold, or could be

sold, to a refinery obviously did not inelude refining and

marketing costs and profits. These costs and profits were

thus excluded in determining the gross income figure for

Alaskan oil. In addition, a number of other costs were

dedueted from gross income. “Upstream” costs, such as

exploration expenses, royalties, lease acquisition and de-

velopment costs, and general overhead and administrative

expenses, and “downstream” costs, such as transporta-

tion and marketing costs were deducted from gross in-

come. AS 43.21.020(¢). The end result was net production

income, which was taxed at the 9.4% rate applicable to all

other corporate income at that time. Former AS 43.20.011

(amended, repealed and reenacted 1981).

The Oil Tax used a similar methodology to tax income

from the pipeline transportation of oil and gas in Alaska.

The items of income and expense related to Alaska pipe-

line transportation were keyed to the amount reported by

the oil companies to the Federal Energy Regulatory

Commission as net operating income. AS 43.21.030. The

validity of this portion of the Oil Tax is also at issue in

this case, though the parties foeus primarily on the

taxation of production income.

Under AS 43.21.040, all other income of the oil compa-

nies continued to be taxed under the UDITPA formula

apportionment method. Such other income was primarily

from marketing and refining operations. In computing

this income, worldwide oil production and pipeline trans-

portation income was subtracted from the total amount of

income subject to apportionment by Alaska. Then the

three-factor formula was applied, again with the produc-

tion and pipeline income in Alaska deleted. The result

attributed to Alaska a portion of worldwide refining and

marketing income of the oil company approximating the

share of such activities occurring in Alaska. This income,

like the production and pipeline income, was taxed at the

rate of 9.4%. Former AS 43.20.011 (amended, repealed

and reenacted 1981).

The Oil Tax was repealed effective January 1, 1982. Ch.

116, $19, SLA 1981. It was replaced with a modified

apportionment formula for the ensuing tax years. AS

43.20.072. The legislature took this step primarily to avoid

a further increase in the possible $1.8 billion liability

caused by this litigation.

Il. THE OIL TAX IS “TRUE” SEPARATE

ACCOUNTING

There are three basic methods by which the income of a

multistate enterprise can be divided among the states

entitled to tax the enterprise’s income: separate account-

ing, specific allocation by situs and formula apportion-

ment. The state claims the Oil Tax is true separate

accounting, while the oil companies contend it is specific

alloeation by situs.

A. The Three Methods For Division of Income

1. Separate Accounting

Separate accounting attempts to carve out of the tax-

payer's overall business the income derived from sources

within a single state, and by accounting analysis, to

determine the profits attributable to that portion of the

business.’ Income within the state is determined without

"See generally J. Hellerstein, State Taxation: Corporate Income

and Franchise Taxes € 8.3, at 323-327 (1983).

reference to the suecess or failure of the taxpayer's

activities in other states.” In the ease of goods (such as

erude oil) sent to another state for processing, separate

accounting values these goods at the price which could be

obtained for them in their unprocessed form when ‘leaving

their state of origin.’ In other words, separate accounting

recognizes that crude oil has a marketable value before it

is retined.

2. Specific Allocation by Situs

Specific allocation by situs refers to the method of

dividing a tax measure (in whole or in part) by tracing

particular property, receipts, or income to their source

state, and attributing the item in its entirety to that

state.'” This method is troublesome because more than

one state is likely to have a legitimate basis for taxing the

same item, especially when the tax is one measured by

income.'| The specific allocation method has been used

commonly with “non-business” income such as income

from dividends, patent and copyright royalties, and gains

or losses from the sale of capital assets.’” Under

UDITPA, some non-business income of this nature is

allocated in its entirety to the situs state. See AS

43.19.010, art. IV, §$§ 5-8.

Confusion may arise because the separate accounting

methodology is very similar to the specific allocation

Sp. Hartman, Federa! Limitations on State and Loeal Taxation

§ 9.17, at 522 (1981).

°G. Altman & F. Keesling, Allocation of Income in State Taxation

38 (2d ed. 1950).

'J. Hellerstein, supra note 7, § 8.4, at 328.

21d. at 329.

approach. Both methods attempt to trace income to an

identifiable source. The primary difference in the two

methods is that separate accounting looks to the activities

in the state and seeks to determine the income related to

that activity. Specific allocation attributes income accord-

ing to situs, or some other specific characteristic of the

business enterprise, rather than on the basis of where the

income itself was earned. Moreover, specific allocation

results in all of a specified type of income and all

associated profits being allocated to one state. Separate

accounting, on the other hand, attempts to segregate out

only those profits attributable to activities within the

state for taxation by that state.

3. Formula Apportionment

Formula apportionment is the method commonly used

to divide the income of a unitary business’ among various

jurisdictions in which the business operates. The formula

method, “unlike separate accounting, does not purport to

identify the precise geographical source of a corporation’s

profits; rather, it is employed as a rough approximation of

a corporation’s income that is reasonably related to the

activities conducted within the taxing State.’'* The

formula method assumes that the total income of a busi-

ness enterprise results from certain income producing

factors — typically property, payroll and sales. The value

of the corporation’s property, payroll and sales within the

taxing state is compared with the value of these factors

13.4

[

A] unitary business may be defined simply as any business

which is earried on partly within and partly [outside] the taxing

jurisdiction.” Keesling & Warren, The Unitary Concept In the Alloca-

tion of Income, 12 Hastings L.J. 42, 46 (1960).

Moorman Mfg. v. Bair, 437 U.S. 267, 273, 57 L. Ed. 2d 197, 204

(1978).

10a

outside the taxing state. The resulting ratio is then

multiplied by the total apportionable net income world-

wide of the multi-state corporation.”

B. The Oil Tax Is Separate Accounting

The oil companies equate the Oil Tax with the specific

allocation by situs method. They contend that the Oil Tax

attributes all of the income and profits from oil produc-

tion and transportation to Alaska. Their argument ig-

nores the difference between the Oil Tax and the specific

allocation method. The Oil Tax does not attribute income

from the production of oil in its entirety to Alaska, the

source state. Instead, it attempts to tax only that portion

of ineome from the oil which is fairly related to Alaskan

production activities. While total revenue for a barrel of

oil during 1978-80 was approximately $26.64, only $6.77

was deemed production income attributable to Alaskan

activities and subject to the Oil Tiax.’® In segregating

from total income a portion related only to activities in

the state, the Oil Tax operates as a separate accounting

system.

The companies argue that the Oil Tax is not true

separate accounting because it fails to take into account

the profit-producing nature of activities oecurring outside

Alaska. For example, the geological and geophysical anal-

'°p. Hartman, supra note 8, § 9.18, at 523-524.

‘The wellhead price did not inelude refining and marketing costs

and profits. The following deductions were also taken from the

wellhead price: royalties, native corporation revenue sharing, produc-

tion, ad valorem and windfall profit taxes, direct operating expenses,

exploration, acquisition, and development costs, uneapitalized inter-

est and general overhead and administrative expenses inside and

outside Alaska (ineluding a reasonable profit). AS 43.21.020(c); 15

AAC 21.200 (Eff. 2/22/79). See graph supra note 6.

lla

ysis of the Prudhoe Bay area was conducted primarily

outside Alaska. The companies argue that only the ex-

penses associated with these outside activities are deduct-

ible in computing income subject to the Oil Tax. Thus, in

their view, the Oil Tax taxes profits earned outside

Alaska.

The state contends that oil companies can deduct prof-

its attributable to general overhead or administrative

activities outside of Alaska. Under Department of Reve-

nue regulations, profits associated with such activities

could be deducted if the taxpayer in fact considered them

profit generally and reported them as such to the stock-

holders. 15 AAC 21.290(b) (Eff. 2/22/79, am. 3/26/82).

The oil companies claim that the Security Exchange

Commission prohibits the allocation of profits in this

manner, citing 15 U.S.C. § 78m(b)(2)(B) (ii) (1982).

This section provides that every issuer of a security

subject to the provision must have an internal accounting

system that permits preparation of financial statements

‘in conformity with generally accepted accounting princi-

ples or any other criteria applicable to such statements.”

The parties’ experts disagree on the acceptability, under

general accounting principles, of allocating profits to

general overhead and administrative activities. Even if we

assume that the allocation of profits to these activities is

not generally accepted, 15 U.S.C. §$ 78m(b) (2) (B) (ii)

allows the use of “other criteria” in financial statements.

If, as the oil companies claim, profits exist that are

actually attributable to general overhead and administra-

tive activities outside of Alaska, the Securities Exchange

Act does not prevent them from reporting such profits to

their shareholders, and then deducting them from their

Alaska income tax.

lZa

Although amended after the repeal of the Oil Tax in

1982, 15 AAC 21.290(b) (Eff. 2/22/79, am. 3/26/82)

operates retroactively.'’ The oil companies, therefore,

may amend their tax reports and returns to deduct any

outside-generated profits attributable to genera! foverhead

and administrative activities associated with Alaskan oil

production not previously deducted in computing Alaskan

taxable income.

The companies also assert that the Oil Tax is an

inappropriate methodology because it presumes that

"The only logical interpretation of the 1982 amendment to 15 AAC

21.290(b) is that it operates retroactively for the tax years 1978-81. It

cannot be meaningfully applied prospectively because it was adopted

after the Oil Tax was no longer in effect. We must assume that the

process of amending 15 AAC 21.290(b) was intended to be operative.

We cannot imagine that the Department of Revenue (“Department”)

would engage in a futile act. See 2A C. Sands, Sutherland Statutory

Construction § 45.12, at 54 (4th ed. 1984).

The retroactivity of the Department’s regulations is governed by

the Alaska Administrative Procedure Act, AS 44.62.240. Under this

statute, an “interpretative regulation,” such as 15 AAC 21.290(b),

may be retroactive only if the agency “has adopted no earlier

inconsistent regulation and has followed no earlier course of conduct

inconsistent with the regulation.” The Department’s earlier omission

of a deduction for outside-generated profits attributable to general

overhead and administration associated with Alaskan oil production

could be construed as inconsistent conduct with the 1982 amendment

to 15 AAC 21.290(b). AS 44.62.240, however, is concerned with the

issues of fairness and notice. See, e.g., AS 43.21.050(d) (authorizing

Department to fashion an equitable tax if relief from an unfair

allocation is required). In this case, a retroactive interpretation of

the 1982 amendment confers a benefit on the oil companies by

allowing an additional tax deduction not previously available. Unlike

many retroactive enactments, 15 AAC 21.290(b), as amended, does

not create a harsh or unfair result for the affected parties. Therefore,

the 1982 amendment to 15 AAC 21.290(b) operates retroactively for

the tax years 1978-81.

l3a

crude oil has a value, i.e., that income has been generated

when the oil is merely brought out of the ground. The oil

companies argue that oil has no value whatsoever until it

is sold.

The oil companies cite our decision in Sjong v. State,

Department of Revenue, 622 P.2d 967 (Alaska 1981),

appeal dismissed, 454 U.S. 1131, 71 L. Ed. 2d 284 (1982),

for the proposition that the oil has no value until it is sold.

We find their reliance misplaced. In Sjong, we upheld an

apportioned net income tax assessed against a nonresi-

dent crab fisherman, who fished exclusively in the interna-

tional waters surrounding Alaska and sold his eateh only

to Alaska processors and canneries. Sjong claimed that

no taxable income could be attributed to the state because

he caught the crabs in international waters. We re-

sponded that “the process of fishing results in no profits

until the eatch is sold to processors in Alaska.” 622 P.2d

at 972 (footnote omitted). Obviously, profits do not result

from crab fishing or oil production until the product is

sold. This does not negate the fact that profits generated

by the sale are partly attributable to the inherent value of

the crab or oil at its point of production.

In the state’s view, the extraction of a natural resource,

in and of itself, generates income. Thus, it argues that it

is reasonable to attribute the income identified with the

extraction of oil, measured in terms of “well-head value,”

to the state in which the oil was extracted. The state is

joined in this position by Amicus Curiae, the states of

Louisiana, Mississippi and Oklahoma, all which have long

employed separate accounting to tax oil production

ineome.”®

18See also Texas Co. v. Cooper, 107 So. 2d 676, 687-91 (La. 1958)

(rejected argument that production of oil, in absence of sale, does not

result in taxable income); Magnolia Petroleum v. Oklahoma Tax

l4a

The United States Supreme Court has likewise recog-

nized the inherent value generated by the extraction of

natural resources. In upholding the constitutionality of

Montana’s severance tax on coal mined in the state, the

Court reasoned that “[t]he entire value of the edal, before

transportation, originates in... [Montana], and mining

of the coal depletes th» resource base and wealth of the

State, thereby diminishing a future source of taxes and

economie activity.”” Commonwealth Edison v. Montana, 453

U.S. 609, 624, 69 L. Ed. 2d 884, 898 (1981) (footnote

omitted). Before it is transported for sale, oil, like coal,

has inherent value, to which profits and income ean

properly be attributed.”

We hold that the Oil Tax is fundamentally a separate

accounting method for dividing income, distinct from

both the specifie allocation by situs and formula appor-

tionment methods.

Comm'n, 121 P.2d 1008, 1013 (Okla. 1941) (“[O]il produced in the

state had an easily ascertainable market price that would represent

the value of the product attributable wholly to Oklahoma.”).

While party to a tax suit in South Carolina, Exxon recognized the

existence of oil's wellhead value. In its brief, Exxon asserted that

“E&P [exploration and production] income is fully earned at the

wellhead, and... [is] funetionally independent of... refining and

marketing operations.” Appellant’s Opening Brief at 19, Exxon v.

South Carolina Tax Comm'n, 258 S.E.2d 93 (S.C. 1979), appeal

dismissed, 447 U.S. 917, 65 L. Ed. 2d 1109 (1980). Exxon weni on to

note that their witness

testified that the posted field price was also accepted by the

accounting profession as a reliable, independent measure of the

value of crude oil at the wellhead. Using this value,...the net

income earned by exploration and production could be and is

accurately measured. This is in accordance with generally ac-

cepted accounting principles, because crude oil has a known,

realizable value.

Id. at 26.

15a

C. Separate Accounting More Accurately Attributes In-

come Generated from Alaskan Oil Than Does Formula

Apportionment

The use of separate accounting to apportion the income

of a unitary business, such as each of the companies in

this litigation, has been roundly ecriticized.”” The United

States Supreme Court has noted:

The problem with this method is that formal account-

ing is subject to manipulation and imprecision, and

often ignores or captures inadequately the many

subtle and largely unquantifiable transfers of value

that take place among the components of a single

enterprise.

Container Corp. of America v. Franchise Tax Board, 463

U.S. 159, 164-65, 77 L. Ed. 2d 545, 553 (1983) (citation

omitted). For instance,

while it [separate accounting] purports to isolate

portions of income received in various States, [it]

may fail to account for contributions to income re-

sulting from functional integration, centralization of

management, and economies of scale. Because these

factors of profitability arise from the operation of the

business as a whole, it becomes misleading to charac-

terize the income of the business as having a single

identifiable “source.” Although separate geographi-

eal accounting may be useful for internal auditing,

See, e.g., G. Altman & F. Keesling, supra note 9, at 38 (“It is

obvious, however, that a separate accounting, no matter how detailed,

is basically false if the business done in more than one state is of a

unitary character,...’’); Dexter, The Unitary Concept in State Income

Taxation of Multistate-Multinational Businesses, 10 Urb. Lawyer 181,

207 (1978) (“[T]he use of separate accounting to attribute unitary

income to a taxing jurisdiction is conceptually inconsistent.’’).

l6a

for purposes of state taxation it is not constitutionally

required.

Mobil Oil v. Commissioner of Taxes, 445 U.S. 425, 438, 63

L. Ed. 2d 510, 521 (1980) (emphasis added; citations

omitted).

These eriticisms, however, are inapplicable to the oil

and gas industry. The standard three-factor formula ap-

portionment method was “developed and designed to

meet the needs of manufacturing and mereantile indus-

tries, and [is] poorly adapted to a good many other

businesses.””’ The United States Supreme Court has

noted that the three-factor formula is “necessarily

imperfect”:

First, the one-third-each weight given to the three

factors is essentially arbitrary. Second, payroll,

property, and sales still do not exhaust the entire set of

factors arguably relevant to the production of income.

Container Corp. of America v. Franchise Tax Board, 463

U.S. at 183 n.20, 77 L. Ed. 2d at 565 n.20 (emphasis

added). An assumption made in the use of formula

apportionment is that “major income-producing elements

ean be identified and that these major elements contrib-

ute the largest portion of the unitary income of the

taxpayer.”

A unique characteristic of unitary oil and gas busi-

nesses is that the major income-producing element is the

value of the oil and gas reserves in the ground. While this

“J. Hellerstein, supra note 7, € 10.9, at 689.

“24. Cohen, Apportionment and Allocation Formulae and Factor:

Used by States in Levying Taxes Based on or Measured by Net

income of Manufacturing, Distributive and Extractive Corporations

14 (1954). |Reeord 1561}

17a

element can be readily identified, it is not recognized

under traditional formula apportionment methods.” In-

stead, the typical factors used are property, payroli and

sales, none of which accurately reflects the oil and gas

corporations’ activities in Alaska. The property factor

ineludes only the original cost of the wells and the lease,

which do not necessarily represent the value of the 0!

reserves themselves. See AS 43.19.010, art. IV, § 11. As a

result, the Prudhoe Bay field is valued at about one

percent of its actual worth.”* Under UDITPA, the payroll

factor includes only wages paid to employees based in the

state. AS 43.19.010, art. IV, $§ 13-14. Oil production,

however, is not a labor-intensive industry. Moreover,

much of the preduetion work is done by employees based

in other states, or by independent contractors, whose

earnings do not appear in the payroll factor. Finally, and

most importantly, the sales receipts under UDITPA are

eredited solely to the destination state. AS 43.19.010, art.

IV, § 16. The oil companies and the state agree that only a

“tiny fraction” of the oil produced in Alaska is actually

sold within the state.

For all of the above reasons, separate accounting, not

formula apportionment, is the prevailing method through-

out the United States for reporting income from oil

production ~ The Comptroller General’s report explains

31d.

2 ’ ‘ b

*4See B. Sorensen, Memorandum to the Honorable Nels A. Ander-

son, Jr. (May 27, 1976) (discussing state corporate income tax).

“Rudolph, State Taxation of Interstate Business: The Uniicry Busi-

ness Concept and Affiliated Groups, 25 Tax L. Rev. 171, 191 (1970). Of

the top five producing states, three — Alaska, Louisiana and

Oklahoma — require the use of separate accounting to determine

income attributable to oil production. Texas imposes no corporate

income tax, and California requires formula apportionment. Statisti-

18a

that states use separate accounting to determine the

income division for unitary oil and gas businesses “‘be-

cause it conforms more to [the businesses’] financial

accounting procedures and...more accurately reflects

income than formula apportionment.””° :

Alaska has not employed separate accounting to divide

the income of all unitary businesses. According to the

state, the Alaska legislature turned to separate account-

ing for oil producing businesses only after it determined

that the use of formula apportionment to compute

Alaska’s share of oil production income would seriously

underestimate the production income that was rightly

subject to taxation by this state.”’

The oil companies cite portions of legislative history to

show that the Oil Tax was imposed in an effort to unilater-

ally effect a renegotiation of oil leases so as to shift the

eost of Alaska’s government to the oil industry. The

legislature, however, formally declared that the income

tax of corporations engaged in oil production or pipeline

transportation would be computed under the Oil Tax

beeause the formula apportionment method did not fairly

represent the extent of those corporations’ oil production

and transportation activities in Alaska. Ch. 110, $1, SLA

eal Abstract of the United States at 730 (1983). But see Cal. Rev. &

Tax Code Ann. § 25137 (West 1979) (allowing separate accounting,

or other alternative methods of apportionment, when total formula

apportionment does “not fairly represent the extent of the taxpayer's

business activity in this state.’’).

*°GAO Report to the Chairman, House Committee on Ways and

Means: Key Issues Affecting State Taxation of Multijurisdictional

Corporate Income Need Resolving 3 (1982). [Reeord 17,023}.

“The Oil Tax was enacted only after it was considered by two

legisiatures over a four year period. Sixty-three hearings were held

and dozens of studies and reports were made.

19a

1978. To look beyond this articulated basis would lead to

a “parade of legislators’ affidavits containing their per-

ceptions” of the Oil Tax’s purpose. Alaska Public Employ-

ees Association v. State, 525 P.2d 12, 16 (Alaska 1984). We

have recently disapproved of such inquiries. Jd. The

United States Supreme Court has also declined to search

’ for the “real” motive beyond the legislature’s expressed

purposes when adjudicating equai protection and com-

merece vlause challenges. In Minnesota ». Clover Leaf

Creamery, 449 U.S. 456, 66 L. Ed. 2d 659 (1981) the

Court stated that it would

assume that the objectives articulated by the legisla-

ture are actual purposes of the statute, unless an

examination of the circumstances forces us to econ-

elude that they ‘could not have been a goal of the

legislation.”

449 U.S. at 463 n.7, 66 L. Ed. 2d at 668 n.7 (quoting

Weinberger v. Wisenfeld, 420 U.S. 636, 648 n.16, 43 L. Ed.

2d 514, 525 n.16 (1975)). Nothing in the record leads us

to econelude that aceurate and fair allocation could not

have been the legislature’s goal in enacting the Oil Tax.”

8 See, e.g., Minutes of Senate Finance Committee (May 21, 1977):

{T]he income tax is not designed to pick up additional money but to

try to establish equal treatment between companies operating within

the state.” (Statement of Senator Chaney Croft) [Reeord 4759];

Minutes of Senate Resource Committee (February 22, 1978): “If

we're seeking to raise money — I think the most effective way is

through a severance tax.” (Statement of Commissioner Sterling

Gallagher [Record 1704]); Office Memo to Senator Rader from Kay

Brown (December 22, 1977): “[S]eparate accounting [is the] most

equitable method because under it every corpjoration] pays [the]

same effective tax rate.” (Statement of Senator Chaney Croft)

[Reeord 1661]; Testimony Before House/Senate Resources Commit-

tees (January 25, 1978): “[T]he purpose [of separate accounting] is

not to get higher taxation, but it gives you a direct fix on what the

20a

The faet that the traditional formula apportionment

method inaccurately reflects the oil companies’ income

and profits derived from Alaskan production activities is

illustrated in the ease of Sohio. The oil companies main-

tain that during 1978-80, when the Oil Tax was in effect,

an average of only 10% of Sohio’s payroll, 12% of its sales

and 50% of its property were in Alaska. At the same time,

Sohio indicated in its 1980 annual report that over 90% of

its total oil production derived from the reserves in

Alaska. [Record 1559] A media report offered by the

state, with which the oil companies did not take issue,

indicated that Alaskan oil had elevated Sohio from seven-

teenth to seventh in earnings in the oil industry:

Onee severely short of crude, Sohio’s bonanza from

its huge reserves of Alaskan oil skyrocketed 1979

profits to $1.2 billion, a phenomenal 2,200% blast in

just one decade.”

Clearly the traditional formula apportionment method

would inadequately reflect the phenomenal value of the

companies’ oil reserves in Alaska.

Ill. SUMMARY JUDGMENT WAS PROPER

The oil companies argue that there are numerous dis-

puted issues of facet which preclude summary judgment

for the state. Several of the alleged disputed issues of fact

are irrelevant to the constitutional challenge and do not

profitability of the industry's operations are.” (Statement of consult-

ant Milton Lipton) [Record 1941]

*°Investing a Mountain of Cash Before the Oil Runs Out: An Oil

Giant’s Dilemma, Bus. Wk. 60 (August 25, 1980). [Record 684]

2la

preclude summary judgment.” Other claims by the oil

companies reduce to the assertion that the characteriza-

tion of the Oil Tax as a separate accounting methodology

is a disputed issue of fact. The state argues that the

question as to whether the Oil Tax is a form of separate

accounting is a question of law. We agree with the state

that a trial is not required in this case. The characteriza-

tion of the Oil Tax is at most a “legislative fact’’ which is

not the type of factual issue for which trial is necessary.

See State v. Erickson, 574 P.2d 1, 4-6 (Alaska 1978). As

the trial eourt held, “the asserted issues of material fact

do not preclude summary judgment in any event because

they are facts only in the sense that they provide premises

in the process of legal reasoning. They are not that type of

fact for which a trial is mandated.”

Finally, the oil companies claim that it is a disputed

issue of faet whether the Oil Tax results in double taxa-

tion because it reaches income earned outside Alaska. An

income attribution method, be it single-factor or three-

factor formula apportionment or separate accounting, is

not constitutionally invalid merely because it may result

in taxation of some income that did not have its source in

the state. See Moorman Manufacturing v. Bair, 437 U.S.

267, 272, 57 Lu. Ed. 2d 197, 204 (1978). Even if facts

demonstrate that the Oil Tax reaches income earned

outside Alaska, as alleged by the oil companies, the

statute will be stricken only upon “clear and cogent

evidence” that the income Alaska attributes to itself is

“out of all appropriate proportions to the business trans-

acted in [the] State,” or has “led to a grossly distorted

result.” Container Corp. of America v. Franchise Taz

“For example, whether the oil companies had, themselves, mea-

sured their income by methods similar to those used by the Oil Tax is

irrelevant.

22a

Board, 463 U.S. at 170, 77 L. Ed. 2d at 556 (citations

omitted). Nothing in the record demonstrates that the Oil

Tax led to a “grossly distorted result” or that it is “out of

all appropriate proportions” to the business of extracting

billions of barrels of oil from reserves ldeated within

Alaska.

Disposition by summary Judgment was appropriate in

this ease because no issue of material fact remained. The

record provided the trial judge with a sufficient back-

ground to reach a decision.” See Kelly v. Zamarello, 486

P.2d 906, 914 (Alaska 1971); cf. Ault v. Alaska State

Mortgage Association, 387 P.2d 698, 701-02 (Alaska 1963).

IV. CONSTITUTIONAL CHALLENGES TO THE

OIL TAX

A. Background

When state corporate income taxes were first

adopted,” separate accounting was regarded as the most

precise method for dividing the income of a multistate

corporation for taxation purposes.” Although apportion-

ment formulas were employed by states and their use

31 4n extensive record was developed, which is divisible into three

categories. First, the bulk of the reeord consists of the legislative

history of the Oil Tax. Second, competing affidavits from various

economists and accountants present divergent economic theories on

how oil production income is generated, and how, as a matter of

policy, it should be divided among the states for taxation purposes.

Finally, a large number of affidavits submitted by the companies

deseribe the various activities associated with oil production which

occur outside Alaska.

“Wisconsin adopted the first corporate income tax in 1911. J.

Hellerstein, supra note 7, € 1.2, at 5.

Bd. € 8.3, at 324.

23a

approved by the United States Supreme Court,” separate

accounting was initially viewed as a benchmark by which

te judge the reasonableness of state apportionment for-

mulas. Thus, in Hans Rees’ Sons, Inc. v. North Carolina,

283 U.S. 123, 128, 75 L. Ed. 879, 905 (1931), the Supreme

Court invalidated a state’s apportionment formula under

federal due process because the taxpayer showed that

under separate accounting only 17% of the income was

attributable to the state, whereas under the apportion-

ment formula used, the state taxed from 66% to 85% of

the corporation’s income.

The use of separate accounting as a basis for challeng-

ing state formula apportionment methods was eventually

rejected in Butler Brothers v. McColgan, 315 U.S. 501, 86

L. Ed. 991 (1942). There, the Court acknowledged that an

apportionment formula could be invalidaied only if the

taxpayer established by clear and cogent evidence that

the formula taxed extraterritorial values. The Court held

that the fact that no net income would be attributable to

the state under separate accounting was insufficient to

invalidate an apportionment formula.

It is true that appellant’s separate accounting system

for its San Franciseo branch attributed no net in-

eome to California. But... [that] does not prove

appellant’s assertion that extraterritorial values are

being taxed.

315 U.S. at 507, 86 L. Ed. at 996.

The Court developed the doctrine that if a multi-state

business is unitary, then the use of a formula apportion-

“Underwood Typewriter v. Chamberlain, 254 U.S. 113, 65 L. Ed.

165 (1920).

24a

ment method by the state is presumptively valid.” In the

instant litigation, all of the companies involved are uni-

tary businesses. Thus, it is undisputed that the use of an

apportionment formula would have been a permissible -

means of atrributing a portion of the companies’ income

to Alaska.

This ease presents an interesting twist on previous

constitutional challenges to state taxation methods by

corporate taxpayers.

In the past, apportionability often has been chal-

lenged by the contention that income earned in one

State may not be taxed in another if the source of the

income may be ascertained by separate geographical

accounting.

Mobil Oil v. Commissioner of Taxes, 445 U.S. at 438, 63 L.

Ed. 2d at 521. Conversely, in this litigation, the oil

companies seek to defeat Alaska’s separate accounting

method by arguing that formula apportionment is _ re-

quired for unitary businesses. In recent years, the Court’s

endorsement of formula apportionment as the preferred

method to divide income of a unitary business has become

increasingly apparent.’ However, we do not interpret this

preference as being a constitutional ruling that formula

apportionment must be employed in lieu of separate

accounting.

®See J. Hellerstein, supra note 7, € 8.7, at 338-343.

6 See, e.g., Exxon v. Wisconsin Dep't of Revenue, 447 U.S. 207, 229-

30, 65 L. Ed. 2d 66, 85 (1980); Mobil Oil v. Commissioner of Taxes,

445 U.S. 425, 446, 63 L. Ed. 2d 510, 526 (1980).

25a

While separate accounting is not constitutionally re-

quired,” and while it may have some weaknesses when

applied to some unitary businesses,” this methodology

has not been rejected as unconstitutional. The United

States Supreme Court in Container Corp. concluded that:

Both geographical accounting and formula appor-

tionment are imperfect proxies for an ideal which is

not only difficult to achieve in practice, but difficult

to describe in theory....

But we see no evidence demonstrating that the mar-

gin of error (systematic or not) inherent in the three-

factor formula is greater than the margin of error

(systematic or not) inherent in... separate account-

ing....

463 U.S. at 182, 183-84, 77 L. Ed. 2d at 564, 565.

B. Due Process

The oil companies claim that the Oil Tax is unconstitu-

tional because it taxes extraterritorial values. They claim

that the state impermissibly taxes all of their production

income from Alaska oil, despite the contributions that

other states have made to those earnings in terms of

research, management and sales.

“As a general principle, a state may not tax value

earned outside its borders.” Earth Resources v. State,

Department of Revenue, 665 P.2d 960, 966 (Alaska 1983)

(quoting ASARCO v. Idaho State Tax Commission, 458

37See Mobil, 445 U.S. at 438, 63 L. Ed. 2d at 521; Exxon v.

Wisconsin Dep’t of Revenue, 447 U.S. at 223, 65 L. Ed. 2d at 8&1.

3 See Mobil, 445 U.S. at 438, 63 L. Ed. 2d at 521; Earth Resources v.

State, Dep't of Revenue, 665 P.2d 960, 966 (Alaska 1983).

26a

U.S. 307, 315, 73 L. Ed. 2d 787, 794 (1982)); Container

Corp. of America v. Franchise Tax Board, 463 U.S. at 164,

77 L. Ed. 2d at 552. Any attempt to tax extraterritorial

values would be an unconstitutional taking of property

under the due process clause.”” Due process imposes two

requirements before a state may tax income generated in

interstate ecommerce. First, a “minimal connection” must

exist between the interstate activities and the taxing

state. Second, the income attributed to the taxing state

must bear a rational relationship to intrastate values of

the enterprise. Exxon v. Wisconsin Department of Revenue,

447 U.S. 207, 219-220, 65 L. Ed. 2d 66, 79 (1980); Mobil

Oil v. Commissioner of Taxes, 445 U.S. at 436-37, 63 L. Ed.

2d at 520; Moorman Manufacturing v. Bair, 437 U.S. at

272-73, 57 L. Ed. 2d at 204.

The first requirement — a minimal connection — is es-

tablished if the corporation “avails itself of the ‘substan-

tia! privilege of carrying on business’ within the State.”

Exxon v. Wisconsin Department of Revenue, 447 U.S. at

220, 65 L. Ed. 2d at 79 (quoting Mobil, 445 U.S. at 437, 63

L. Ed. 2d at 520, quoting Wisconsin v. J.C. Penney Co., 311

U.S. 435, 444-45, 85 L. Ed. 267, 271 (1940)). Clearly, a

nexus exists between the oil production and transporta-

tion activities of ARCO, Exxon, and Sohio, and the State

of Alaska.

As to the second requirement, the United States Su-

preme Court has not required absolute precision in deter-

mining a state’s share of interstate income. In Moorman

“The due process clause of the fourteenth amendment provides in

part:

[N]or shall any State deprive any person of life, liberty, or

property, without due process of law; nor deny to any person

within its Jurisdiction the equal protection of the laws.

U.S. Const. amend. XIV, § 1.

27a

Manufacturing v. Bair, 437 U.S. 267, 57 L. Ed. 2d 197, an

animal feed company which manufactured its product in

Illinois and sold it in Iowa challenged the constitutional-

ity of lowa’s statutory apportionment formula. Instead of

the typical three-factor (payroll, property and sales)

formula, lowa used a single-factor formula based exelu-

sively on sales. The corporation argued that this formula

resulted in extraterritorial taxation and violated the due

process and commerce clauses of the federal Constitution.

In addressing the rational relationship requirement, the

Supreme Court stated:

States have wide latitude in the selection of appor-

tionment formulas and...a formula-produced as-

sessment will only be disturbed when the taxpayer

has proved by “clear and cogent evidence” that the

income attributed to the State is in fact “out of all

appropriate proportion to the business transacted ...

in that State,” or has “led to a grossly distorted

result.”

437 U.S. at 274, 57 L. Ed. 2d at 205 (citations omitted).

The Court found the taxpayer had failed to demonstrate

any arbitrary result in its ease, and thus the tax survived

the due process challenge.

More recently the United States Supreme Court has

expressly refused to constitutionally require a particular

income attribution method to the exclusion of all others.

In Container Corp. of America v. Franchise Tax Board, 463

U.S. 159, 77 L. Ed. 2d 545, the Supreme Court upheld

California’s inclusion of the income of Container Corpora-

tions’ foreign subsidiaries in the state’s apportionment

formula. The corporation argued that inclusion of this

income violated both the due process and commerce

clauses, because the same income California was subject-

ing to apportionment was taxed by, foreign jurisdictions

28a

under a separate accounting methodology. In rejecting

this argument, the Court noted:

In the ease of a more-or-less integrated business

enterprise operating in more than gne State,... ar-

riving at precise territorial allocations of “value” is

often an elusive goal, both in theory and in practice.

For this reason and others, we have long held that the

Constitution imposes no single formula on the States,

and that the taxpayer has the “distinet burden of

showing by ‘clear and cogent evidence’ that [the

state tax] results in extraterritorial values being

One way of deriving locally taxable income is on the

basis of formal geographical or transactional account-

ing [separate accounting].

463 U.S. at 164, 77 L. Ed. 2d at 552-53 (citations omitted,

emphasis added).

We hold that the Oil Tax satisfies the second require-

ment of the due process clause. [t makes a reasonable

attempt to attribute only that income to Alaska that was

generated in Alaska, while excluding expenses and profits

generated beyond Alaska’s borders. Under a separate

accounting approach, income is viewed as earned when

and where the principal operating activity occurs. Sup-

port activities are universally accounted for only as ex-

penses, whether they occur in or outside the income-

producing state. As with other states’ separate accounting

methods, the Oil Tax allows for the deduction of costs and

profits from marketing, refining and transportation, and

expenses related to other support activities.” Moreover,

Alaska’s tax is unique in allowing a deduction for out-of-

“See La. Income Tax Reg. art. 47:244.A (1985); Miss. Code Ann.

§ 27-7-23(b) (3) (1983); Okla. Stat. Ann. tit. 68, §2358, A.4.a,b,ec

29a

state profits as well as costs of general overhead and

administrative activities incident to Alaskan oil produce-

tion and transportation, if the companies report them as

such. See 15 AAC 21.290(b) (Eff. 2/22/79, am. 3/26/82).

By allowing all of these deductions, the Oil Tax is in-

tended to tax only those profits associated with the

companies’ activities within the state. Thus, the Oil Tax

taxes only a portion of the companies’ income, although

by a technique quite different from formula apportion-

ment.*’ Because the Oil Tax operates to tax only a portion

of the companies’ income, we hold that it satisfies the dual

requirements of due process.

CC. Commerce Clause

We have previously recognized that the commerce

clause” “places restraints upon the taxing power of states

similar to those of the due process clause. In fact, these

two constitutional limits overlap to a great extent.” Sjong

v. State, Department of Revenue, 622 P.2d at 973. Gener-

ally, if a state tax “is applied to an activity with a

substantial nexus with the taxing State, is fairly appor-

tioned, does not discriminate against interstate commerce

and is fairly related to the services provided by the

State,” there is no impermissible burden on interstate

(1985); see also Webb Resources v. MeCoy, 401 P.2d 879, 890 (Kan.

1965).

"See Container Corp., 463 U.S. at 188, 77 L. Ed, 2d at 568

(Formula apportionment and separate accounting are “two distinet

methods of allocating the income of a multinational enterprise.’’).

“The commerce clause is set forth in article 1, §8 of the United

States Constitution:

The Congress shall have Power To... regulate Commerce with

foreign Nations, and among the several States, and with the

Indian tribes; ..

30a

commerce. Complete Auto Transit v. Brady, 430 U.S. 274,

279, 51 L. Ed. 2d 326, 331 (1977). The nexus and fair

apportionment factors have been discussed in the previ-

ous due process section. We now turn to a consideration

of the other two factors of the Complete 'Auto Transit test.

The oil companies contend that the Oil Tax violates the

commerce clause because it inevitably results in overlap-

ping or duplicative taxation, thus discriminating against

businesses engaged in interstate commerce. They claim

that recent United States Supreme Court decisions on the

subject of multiple taxation render the Oil Tax unconsti-

tutional, citing Japan Line v. County of Los Angeles, 441

U.S. 434, 60 L. Ed. 2d 336 (1979), Mobil Oil v. Commis-

stoner of Taxes, 445 U.S. 425, 63 L. Ed. 2d 510, and Exrron

v. Wisconsin Department of Revenue, 447 U.S. 207, 65 L.

Ed. 2d 66. We disagree.

In Japan Line, six Japanese companies challenged a

California property tax on shipping containers. The Japa-

nese-owned containers were subject to a property tax on

100% of their value in their home port of Japan. Under

California’s tax, all containers in the state on a specified

tax day were subject to an apportioned ad valorem prop-

erty tax. The companies contended that California’s tax,

as applied to their containers, created multiple taxation

and violated the commerce clause.

The Court in Japan Line assumed that the Complete

Auto Transit test was met. However, because taxation of

instrumentalities of foreign commerce was at issue, the

Court found it necessary to inquire whether California's

tax, notwithstanding its fair apportionment, created a

substantial risk of international multiple Yaxation. 441

U.S. at 451, 60 L. Ed. 2d at 349. In this regard, the Court

contrasted taxation of interstate instrumentalities with

that of international instrumentalities:

3la

In order to prevent multiple taxation of interstate

commeree, this Court has required that taxes be

apportioned among taxing jurisdictions, so that no

instrumentality of commerce is subjected to more

than one tax on its full value. The corollary of the

apportionment principle, of course, is that no juris-

diction may tax the instrumentality in full. “The rule

which permits taxation by two or more states on an

apportionment basis precludes taxation of all of the

property by the state of the domicile. ... Otherwise

there would be multiple taxation of interstate opera-

tions.” The basis for this Court’s approval of appor-

tioned property taxation, in other words, has been its

ability to enforce full apportionment by all potential

taxing bodies.

441 U.S. at 446-47, 60 L. Ed. 2d at 347 (citations omit-

ted). While the Court could require apportionment among

the states for property taxation purposes, it obviously

could not prevent Japan from taxing 100% of the value of

the containers. The Court held California’s nondiscrimi-

natory tax unconstitutional because it resulted in actual

multiple taxation of instrumentalities of international

commerce.”

The oil companies in the present litigation argue that if

Alaska had been the home port instead of Japan in Japan

Line, the Supreme Court would have invalidated Alaska's

100% ad valorem tax. We agree that Alaska would not be

entitled to apply a property tax to the full value of

instrumentalities of foreign commerce. But the oil compa-

“The Court indicated that it need not decide “under what cireum-

stances the mere msk of multiple taxation would invalidate a state

tax, or whether this risk would be evaluated differently in foreign, as

opposed to interstate, commerce.” 441 U.S. at 452 n.17, 60 L. Ed. 2d

at 350 n.17 (emphasis in orginal)

32a

nies’ attempt to equate a property tax on the full value of

goods used in foreign commerce with the Oil Tax is

inappropriate. While the single situs property tax may be

analogous to the specific allocation by situs method of

income taxation, it is a totally different species from

separate accounting.” The Oil Tax, as a separate account-

ing division-of-income method, does not automatically

conflict with an apportionment method and result in

double taxation.” Beeause separate accounting and

formula apportionment can coexist without overlapping

tax bases, Japan Line does not require invalidation of the

Oil Tax.”

In Mobil Oil v. Commissioner of Taxes, 445 U.S. 425, 62

L. Ed. 2d 510, the Court upheld the constitutionality of

the inclusion of foreign source dividend income in the

total income subject to taxation by Vermont. Mobil ar-

gued that Vermont could not tax its dividend income

because New York, the state of commercial domicile, had

the power under the commerce clause te allocate ail of the

dividend income to itself. Allowing Vermont to tax a

share of the income by apportionment would, therefore,

result in double taxation if New York implemented such a

“See discussion supra section II. A. 2.

Container Corp., 463 U.S. at 194-95, 77 L. Ed. 2d at 572.

“There is language in Japan Line to the effect that an “unappor-

tioned” tax will not be sustained. 441 U.S. at 447, 60 L. Ed. 2d at 347.

However, this statement must be read in context. In the property tax

area, separate accounting is not even a viable theory for dividing

income. Allocation of the full property to one state or apportionment

among several states are the only two options. Since allocation of the

full preperty value to one of several proper taxing jurisdictions is

unconstitutional, apportionment is the only permissible means of

dividing the value of property used in interstate commerce for

property taxation purposes.

33a

tax. In this situation, the Court considered the risk of

multiple taxation to be sufficient since the specific alloca-

tion by situs method was “theoretically incommensurate’”’

with apportionment.*’ The Court found that if one method

were constitutionally preferable, a tax based on the other

method could not be sustained. 445 U.S. at 444-45, 63 L.

Ed. 2d at 525.

Instead of accepting Mobil’s argument that specific

allocation by situs was preferable, the Court found appor-

tionment to be the better approach. While the Court chose

not to rule on the econstitutionality of a hypothetical New

York tax, the Court stated that in theory New York could

not exclusively tax Mobil’s dividend income since

the dividends reflect income from a unitary business,

part of which is conducted in other states. In that

situation, the income bears relation to benefits and

privileges conferred by several states. These are the

circumstances in which apportionment is ordinarily

the aeeepted method.

Id. at 446, 63 L. Ed. 2d at 526 (emphasis added).

Several months after the Mobil case, the Court decided

Exxon v. Wisconsin Department of Revenue, 447 U.S. 207,

65 L. Ed. 2d 66. Exxon, like this litigation, involved state

taxation of oil production income. Exxon’s activities in

Wisconsin were limited to the marketing of petroleum

products. Exxon challenged Wisconsin’s inclusion of oil

production income in the income subject to apportion-

ment by Wisconsin. Exxon argued that production of oil

and marketing of oil were two distinct operations. In

Exxon’s view, since it could illustrate by separate ac-

eounting that these two activities were distinet, Wiscon-

“Cf, Moorman, 437 U.S. at 277, 57 L. Ed. 2d at 207.

34a

sin could not constitutionally inelude production income

in the tax base for apportionment.

Exxon contended that the commerce clause required

the allocation of all income derived frem exploration and

production functions to the situs state, rather than inclu-

sion in the apportionment formula. Exxon asserted that

since the producing state was constitutionally entitled to

allocate all production ineome to itself, non-producing

states could not tax an apportioned share of this same

income.

To this, the Supreme Court replied:

We do not agree. As was the case with income from

intangibles, there is nothing “talismanie” about the

concept of situs for income from exploration and

production of erude oil and gas. Presumably, the

States in which appellant’s crude oil and gas produe-

tion is located are permitted to tax in some manner

the income derived from that production, there being

an obvious nexus between the taxpayer and those

States. However, “there is no reason in theory why

that power should be exclusive when the [exploration

and production income as distinguished through sep-

arate functional accounting] refleet[s] income from

a unitary business, part of which is condueted in

other States. In that situation, the income bears

relation to benefits and privileges conferred by sev-

eral States. These are the cireumstances in which

apportionment is ordinarily the accepted method.”

In short, the Commerce Clause does not require

that any income which a taxpayer is able to separate

through accounting methods and attribute to explo-

ration and production of erude oil and gas be allo-

eated to the States in which those production centers

are located. The geographic location of such raw

materials does not alter the fact that such income is

part of the unitary business of the interstate enterprise

and is subject to fair apportionment among all States to

which there is a sufficient nexus with the interstate

activities of the business.

447 U.S. at 229-30, 65 L. Ed. 2d at 85 (emphasis added;

citations omitted).

Basically, both the oil companies and the state view

Japan Line, Mobil and Exxon as prohibiting allocation of

oli production income entirely to the situs state. The

debate focuses on whether the Oil Tax allocates all oil

production income to Aiaska, as the oil companies con-

tend, or is instead a distinet method of dividing the

production income, as the state contends. Because we

hold that the Oil Tax is a distinet method of dividing oil

production income by use of separate accounting, its

constitutional validity is not directly determined by these

three cases.”

While Mobil and Exxon indicate the Court’s strong

endorsement of the use of apportionment formulas, the

Court clearly implied that the use of separate accounting

is constitutionally permissible under the commerce

clause.” The constitutional preference for apportionment

of “unitary” dividend income in Mobil stemmed from the

fact that the two competing methods at issue —- specific

allocation and formula apportionment — were “theoreti-

*See W. Hellerstein, Memorandum to Mr. Milton Barker (April 20,

1981) (discussing proposed Oil Tax). [Record 17,091]

In both Exron and Mobil, the Court stated that separate account-

ing “is not constitutionally required.” Exxon, 447 U.S. at 223, 65 L.

Ed. 2d at 81; Mobil, 445 U.S. at 438, 63 L. Ed. 2d at 521.

36a

cally incommensurate.” Mobil, 445 U.S. at 444, 63 L. Ed.

2d at. 525."

The type of duplicative taxation found unacceptable in

Japan Line, Exxon and Mobil all fnvolved one taxing

jurisdiction using the specific allocation by situs method,

while another used apportionment. In other words, one

taxing jurisdiction taxed the whole pie, while another

taxed a slice. In such a situation, double taxation is

inevitable, and one method has to be chosen over another.

By contrast, in Moorman Manufacturing v. Bair, 437 U.S.

267, 57 L. Ed. 2d 197, two jurisdictions used different

apportionment formulas. Each took only a slice of the pie,

but since they used different formulas to divide the pie,

the Court recognized that there was high probability of

some overlap. While the potential for overlap existed, it

certainly was not inevitable, and the Court upheld Iowa’s

apportionment method. The Court held that prevention of

duplicative taxation should be effected by a national

uniform rule for the division of income, but that the

“Constitution ...is neutral with respect to the content of

any uniform rule.” Jd. at 279, 57 L. Ed. 2d at 208. Given

the absence of federal legislation, the Court was unwilling

to specify that a particular methodology was constitution-

ally preferable. While acknowledging a clear risk of multi-

ple taxation in a variety of situations due to the

divergence in division-of-income techniques employed by

the various states, the Court found such risk preferable to

choosing one technique as constitutionally superior to

another. Jd. at 278-80, 57 L. Ed. 2d at 207-09.

The oil companies in the present litigation acknowledge

that Moorman evidenced the Supreme Court’s high degree

of tolerance for apportionment formulas. But in their

See W. Hellerstein, supra note 48, at 2. [Record 17,093]

37a

view, this tolerance does not extend beyond the apportion-

ment method. They claim that Moorman does not sanction

the use of Alaska’s Oil Tax because the tax is not appor-

tioned. We disagree. First, as we have previously ex-

plained, the Oil Tax utilizes a division-of-income method.

Second, while Mcorman pertained to the _ conflict

presented when two jurisdictions employ different types

of formula apportionment, the principle of the opinion

was that non-uniform state taxes are inevitable and con-

stitutionally permissible. Since Moorman, the Court has

continued to maintain that states enjoy broad leeway in

their choice of division-of-inecome methods. See Container

Corp. of America v. Franchise Tax Board, 463 U.S. at 164,

77 L. Ed. 2d at 552.

Container Corp. closely resembles the situation in this

ease. In Container Corp., California sought to determine

its share of total income by use of formulary apportion-

ment, while foreign jurisdictions employed separate ac-

counting.” Discussing discrimination against interstate

ecommerce, the Court reiterated its view that the Constitu-

tion does not require the elimination of all overlapping

taxation on the interstate level. 463 U.S. at 171, 77 L. Ed.

2d at 557. Thus, if the problem were limited to the

interstate level, “the fact that different jurisdictions ap-

plied different methods of taxation... would probably

make little constitutional difference.” 463 U.S. at 185, 77

L. Ed. 2d at 566.

In Container Corp., the Court faced the additional

complication of international commerce. Even so, the

Court upheld the tax, distinguishing Japan Line on the

ground that Japan’s specific alloeation by situs method

necessarily resuited in double taxation.

a ‘ , : ,

See discussion supra section IV. B.

38a

Here, by contrast, we are faced with two distinct

methods of allocating the income of a multi-national

enterprise. The ‘“arm’s-length” approach [i.e., sepa-

rate accounting] divides the pie on the basis of

formal accounting principles. The formula apportion-

ment method divides the same pie on the basis of a

mathematical generalization. Whether the combina-

tion of the two methods results in the same income

being taxed twice or in some portion of income not

being taxed at all is dependent solely on the facts of

the individual ease.

463 U.S. at 188, 77 L. Ed. 2d at 568 (footnote omitted).

The Court held that the two taxing methods do “not

ereate an automatic ‘asymmetry’.” Id. at 194-95, 77 L. Ed.

2d at 572. “[I]t would be perverse, [therefore,| simply

for the sake of avoiding double taxation, to require Cali-

fornia to give up one allocation method that sometimes

results in deuble taxation in favor of another allocation

method that also sometimes results in double taxation.”

Id. at 1938, 77 L. Ed. 2d at 571. The fact that the Court

found the two methods could coexist on the international

level, where duplicative taxation is viewed more strictly,

makes separate accounting a quite permissible alternative

when only interstate commerce is involved, as is the case

in the present litigation.

The Supreme Court has repeatedly recognized that

neither separate accounting nor formula apportionment

will result in the attribution of the exact amount of

income earned in the state to that particular state. Some

multiple taxation may result when one jurisdiction em-

ploys one method and another uses a different approach.

This threat is inherent in any system where state attribu-

tion methods are nonuniform. But a state does not offend

the commerce clause merely because its method of divid-

39a

ing income is different from that of its neighbors. Moor-

man Manufacturing v. Bair, 4387 U.S. at 278-80, 57 L. Ed.

2d at 208-09.

We have already explained that the separate account-

ing method employed by the State of Alaska does not tax

all profits generated from Alaskan oil production and

does not impermissibly attribute extraterritorial values to

Alaska. Using the leeway it retains absent a federal

uniform approach, the Alaska legislature chose a constitu-

tionally permissible method of income division, albeit not

the one “ordinarily” employed for most other types of

unitary businesses.

We hold that the Oil Tax comports with the require-

ments of the Complete Auto Transit test and creates no

impermissible burden on interstate commerce. The loca-

tion of the oil fields in Prudhoe Bay creates a substantial

‘nexus’ between the oil companies’ activities and the

State of Alaska.” As discussed above, the Oil Tax is fairly

apportioned to represent only that part of the companies’

income generated from its Alaskan activities — oil and

gas production and transportation. As in Container Corp.,

the Oil Tax does not inevitably result in multiple taxation.

Moreover, any possible overlap created by Alaska’s use of

separate accounting and other jurisdictions’ use of differ-

ent income division methods is not the fault, in the

constitutional sense, of Alaska. Thus, the Oil Tax does not

discriminate against interstate commerce. Finally, be-

cause the oil companies all benefit from the “substantial

52 oy _ . ’ 2 wd ' +). id =<

See Exxon v. Wisconsin Dep't of Revenue, 447 U.S. at 229, 65 L.

Ed. 2d at 85.

40a

privilege’ of extracting oil in Alaska, the Oil Tax is

fairly related to services provided in the state.

D. Federal and State Equal Protection

The oil companies assert that the Oil Tax violates both

state and federal equal protection since it ‘arbitrarily

[and] irrationally subject[s] a special group of taxpayers

to treatment not accorded taxpayers at large.” They

argue, in effect, that using a distinet method of taxation

for multistate oil companies, but not for any other unitary

businesses, violates equal protection. We reject the oil

companies’ equal protection challenge.

The analysis under Alaska’s equal protection clause

involves a three-step process. Alaska Pacific Assurance v.

Brown, 687 P.2d 264, 269-70 (Alaska 1984) [hereinafter

eited as ALPAC]; State v. Ostrosky, 667 P.2d 1184, 1192-

94 (Alaska 1983), appeal dismissed, ___. U.S. , 81 L.

Ed. 2d 339 (1984); State v. Erickson, 574 P.2d 1, 11-12

(Alaska 1978). First, in order to ascertain the appropri-

ate level of review, the nature of the constitutional inter-

est affected must be identified. ALPAC, 687 P.2d at 269.

Next, the validity of the statutes’ purpose must be ane-

lyzed in light of the interest impinged. 7d. Lastly, the

means chosen must be examined, also in light of the

53 See Commonwealth Edison v. Montana, 453 U.S. at 628-29, 69 L.

Ed. 2d at 901.

In determining questions of equal protection under the Alaska

Constitution, we employ a single test. As we stated in State v.

Erickson, 574 P.2d 1, 12 (Alaska 1978):

Such a test will be flexible and dependent upon the importance

of the rights involved. Based on the nature of the right, a greater

or lesser burden will be placed on the state to show that the

classification has a fair and substantial relation to a legitimate

governmental objective.

4la

interest, to insure that they are sufficiently related to the

goals of the statute. Jd. at 269-70.

The interest involved here, freedom from disparate

taxation, lies at the low end of the continuum of interests

protected by the equal protection clause.” Regarding the

statute’s purpose, the oil companies claim that greed and

other improper motives led the Alaska legislature to enact

the Oil Tax. The state, however, has adequately estab-

lished that a primary purpose of the Oil Tax was to rectify

a perceived underestimation of oil production and pipe-

line transportation income that occurred with the applica-

tion of an apportionment formula. The goal was to insure

that the tax rate assessed to the oil companies on this

income was commensurate with the rate applicable to the

income of other corporations in the state. Ch. 110, $1,

SLA 1978. Taxing the oil companies differently to rectify

a pereeived inequity was the legislature’s attempt to

prevent disparate treatment; thus, the validity of this

purpose in light of the companies’ interest is established.

Finally, the means chosen were sufficiently related to the

goals of the legislation. The use of separate accounting,

rather than formula apportionment, increased the amount

of production and transportation income subject to

Alaska taxation and more fairly represented the extent of

the business activities of the oil companies in Alaska.

The Oil Tax did not adversely affect any fundamental

interest, nor did it contain a suspect classification. Thus,

to be upheld under the federal analysis, it need only to

have been rationally related to a legitimate state interest.

Exxon v. Eagerton, 462 U.S. 176, 195-96, 76 L. Ed. 2d 497,

513 (1983). The rational basis standard is particularly

See Regan v. Taxation with Representation of Washington, 461

U.S. 540, 547, 76 L. Ed. 2d 129, 138 (1983). See generally P.

Hartman, supra note 8, § 3.1, at 131-38.

42a

easy to meet in the area of taxation. The United States

Supreme Court has stated that “[l]egislatures have espe-

cially broad latitude in ereating classifications and dis-

tinetions in tax statutes.” Regan v. Taxation with

Representation of Washington, 461 U.S. 540, 547, 76° L. Ed.

2d 129, 138 (1983). The Oil Tax clearly bore a rational

relationship to the state’s goal of correcting a perceived

inequity in the tax structure.

While the oil companies dispute the underlying premise

that the Oi! Tax reetifies inequities, the legislature could

have reasonably coneluded that the Oil Tax would more

accurately compute the companies’ income generated in

Alaska. Thus, the Oil Tax survives the equal protection

challenge, under both the "'nited States and the Alaska

Constitutions.

E. Contract Clause

The oil companies argue that the Oil Tax is invalid

because it impairs the obligation of the state's ea)

contracts with them.”® They contend that the tax increases

the state’s share under the lease contracts, and that such

modification of the terms of the leases violates the con-

tract clause of the United States Constitution.”

This argument is without merit. No lease provision has

been impaired. In entering into the leases the state could

*Beginning in 1964 the state entered into lease contracts With the

oil companies, whereby the state sold the companies whatever gas and

oil might be found on the leaseholds in exchange for “bonus”

payments and royalties of 12%.

‘No State shali... pass any... Law impairing the Obligation of

Contracts....’ U.S. Const., art. I, § 10, el. 1.

43a

not,” and did not, contract away its power as a sovereign

to tax income earned in the state. Merrion v. Jicarilla

Apache Tribe, 455 U.S. 130, 71 L. Ed. 2d 21 (1982)

disposes of this issue:

Contractual arrangements remain subject to subse-

quent legislation by the presiding sovereign. Even

where the contract at issue requires payment of a

royalty for a license or franchise issued by the

governmental entity, the government’s power io tax

remains unless it “has been specifically surrendered

in terms which admit of no other reasonable interpre-

tation.” St. Louis v. United R. Co., 210 U.S. 266, 280,

52 L. Ed. 1054, 28 S. Ct. 630 (1908).

455 U.S. at 148, 71 L. Ed. 2d at 36 (citations omitted); see

also Exxon v. Eagerton, 462 U.S. at 187-94, 76 L. Ed. 2d at

508-12.

Vill. RETROACTIVITY OF THE OIL TAX

The Oil Tax Act was signed into law on July 8, 1978.”

Section 4 of the Act provided that it would apply retroac-

tively to January 1, 1978. Section 5 provided the Act

would be “effective” immediately. While the Senate voted

16 to 4 to approve section 5, the entire Oil Tax Act only

passed by a vote of 11 to 9. Thus, at no time did more than

11 senators vote to approve section 4.

The companies argue that the Act may not constitution-

ally be made applicable to income earned prior to July 8,

1978. They interpret article II, § 18 of the Alaska Consti-

“The Alaska Constitution provides: “The power of taxation...

shall not be... contracted away, except as provided in this article.”

Alaska Const. art. LX, § 1.

Ch. 110, SLA 1978.

d4ta

tution” and AS 01.10.070(a)™ as requiring the approval

of two-thirds majority of each house of the legislature to

give retroactive effect to a new law. The companies argue

that even though a two-thirds vote was attained for an

immediate effective date, a two-thirds vote was ‘also re-

quired to enact section 4, applying the Act retroactively to

January 1, 1978. We disagree.

AS 01.10.090 states that “[n]o statute is retrospective

unless expressly declared therein.”” A two-thirds vote

requirement does not appear in that section, nor else-

where in Alaska law. The legislature, however, has recog-

nized that where retroactive application of a portion or all

of a bill is desired, an immediate effective date, which

does require a two-thirds vote under article II, § 18 and

AS 01.10.070(a), should be used in conjunction with the

retroactivity section. Legislative Affairs Agency, Manual

of Legislative Drafting 11 (1977); Uniform Rules of the

Alaska State Legislature, Rule 10 (May 3, 1977). Acecord-

ingly, because two-thirds of the legislature voted to make

the Oil Tax Act immediately effective, a separate two-

thirds vote for the Act to be retroactive was not constitu-

tionally required. The Oil Tax was properly retroactive to

January 1, 1978.

The superior court’s action in granting the state's

motion for summary judgment is AFFIRMED.

[Statutory Appendix omitted; see App. C.]

Alaska Const. art. II, § 18 provides:

Laws passed by the legislature become effective ninety days

after enactment. The iegislature may, by concurrence of two-

thirds of the membership of each house, provide for another

effective date.

*TAS 01.10.070(a) contains language paralleling Alaska Const. art.

II, $18.

45a

Il. Memorandum of Decision and Order Granting Sum-

mary Judgment of the Superior Court of the State of

Alaska, Third Judicial District, dated May 27, 1983.

IN THE SUPERIOR COURT

FOR THE

STATE OF ALASKA

THIRD JUDICIAL DISTRICT

No. 3AN 79-1903

ATLANTIC RICHFIELD COMPANY, ET AL.,

Plaintiffs,

Vv.

STATE OF ALASKA, ET AL.,

Defendants.

No. 3AN 80-1542

EXXON CORPORATION, ET AL.,

Counterclaimants,

Vv.

STATE OF ALASKA, ET AL.,

Defendants on Counterclaim.

MEMORANDUM OF DECISION AND

ORDER GRANTING SUMMARY JUDGMENT

This ease involves a motion for summary Judgment by

the defendant to declare the Oil and Gas Corporate

income Tax Act, AS 43.21, constitutional. Counsel have

been most helpful in delineating the issues and citing the

appropriate authorities.

The plaintiffs challenge AS 43.21 on the grounds that it

violates the due process, equal protection and commerce

elauses of the United States Constitution and the equal

protection clause and Art. II, see. 18, Alaska Constitu-

46a

tion, and is in violation of AS 43.19, the multistate tax

compact.

The plaintiffs assert that genuine issues of material

fact exist which precludes the grant of a motion for

summary judgment. I find that the disputes over the

existence of facts do not preclude the grant of summary

judgment. Ault v. Alaska State Mortgage Association, 387

P.2d 698, 701 (Alaska 1963). Further, the asserted issues

of material fact do not preclude summary judgment in

any event because they are facts only in the sense that

they provide premises in the process of legal reasoning,

they are not that type of faet for which a trial is

mandated.

A detailed analysis of the statute, its history, and the

arguments on both sides could be set forth. However,

there is no purpose in reiterating what counsel have so

ably done. In addition, the patina of revenue rulings,

eases and eeonomiec theories are taken into account with-

out explication.

The due process challenge is without merit because

there is more than a minimal connection between Alaska,

the taxing state, and the activities of the taxpayer reached

by the taxing statute and the income attributed to Alaska

is rationally related to values connected with Alaska

(there is no requirement of arithmetical perfection). Mo-

bil Oil Corp. v. Commissioner of Taxes, 445 U.S. 425

(1980) and Moorman Manufacturing Co. v. Bair, Director

of Reveune of Iowa, 437 U.S. 267 (1978).

The plaintiff's equal protection argument is answered

by reviewing State v. Erickson, 574 P.2d 1 (Alaska 1978).

The state’s approach to taxing income under the statute

in question does not violate the equal protection clauses

of either the United States or Alaska Constitutions.

47a

The commerce clause challenge is overcome if the tax in

question is applied to an activity with a substantial

contact with the taxing state, the tax is fairly apportioned

and if the tax is fairly related to the services provided by

the state. Complete Auto Transit, Inc. v. Brady, 430 U.S.

274 (1977) and Commonwealth Edison Co. v. Montana, 101

S.Ct. 2946 (1980). All of those tests are met in this case.

The other points raised by the plaintiffs as precluding

the grant of summary judgment are not well taken and,

therefore,

IT IS ORDERED that the defendant’s motion for

summary judgment is granted.

DATED at Anchorage, Alaska, this 27th day of May,

1983.

/s/ Vietor D. Carlson

Vietor D. Carlson

Superior Court Judge

This is to certify that a copy of the above Memorandum

of Decision was mailed on the 27th day of May, 1983 to:

Ralph I. Miller, Esq. Robert E. McManus, Esq.

William B. Rozell, Esq. Riehard O. Gantz, Esq.

George J. Dunn, Esq. O’Melveny & Myers

Robert J. Mahoney, Esq. Barry L. Wertz, Esq.

Attorney General William L. Lutz, Jr.

David A. Nelson, Esq. George J. Dunn, Esq.

Barry L. Wertz, Esq.

/s/_ Ruth E. Willard

Seeretary to Judge Carlson

48a

III. Order for Final Judgment of the Superior Court of

the State of Alaska, Third Judicial District, dated

July 6, 1983 and effective May 27, 1983.

[Caption omitted ]

ORDER FOR FINAL JUDGMENT

This action having been heard on motion by defendants

and defendants on counterelaim, State of Alaska, et al.,

for summary judgment dismissing all counts of the com-

plaints and ecounterelaim herein, and this court having

granted defendants motion by order dated May 27, 1983,

IT IS HEREBY ORDERED that defendants shall

have judgment against plaintiffs and counterclaimants,

dismissing all counts of the complaints and eounterelaim

herein, and that defendants recover their costs in the

amount of $4,000,000 and attorneys fees in the amount of

$534,355.54 from plaintiffs and counterclaimants.

This judgment is effective 5-27-83.

DATED: 7-6-83

/s/Vietor D. Carlson

Superior Court Judge

[Certification of service omitted |

IV. Judgment of the Superior Court of the State of

Alaska, Third Judicial District, dated July 5, 1983.

[Caption omitted |

JUDGMENT

The court having granted a motion for summary jJudg-

ment on May 27, 1983, judgment consistent therewith is

49a

hereby granted pursuant to Rule 58(b) (2), Alaska Rules

of Civil Procedure.

DATED at Anchorage, Alaska, this 5th day of July,

1983.

/s/Vietor D. Carlson

Vietor D. Carlson

Superior Court Judge

[Certification of service omitted |

B. NOTICE OF APPEAL.

IN THE SUPREME COURT

OF THE

STATE OF ALASKA

Alaska Supreme Court

File No. S-52

Opinion No. 2965

Superior Court Nos.

3AN-79-1903 Civil

3AN-80-1542 Civil

ATLANTIC RICHFIELD COMPANY, ET AL.,

Appellants,

STATE OF ALASKA, ET AL.,

Appellees.

Appeal from the Superior Court

Third Judicial District

Hon. Victor D. Carlson, Judge

NOTICE OF APPEAL TO THE

SUPREME COURT OF THE UNITED STATES

PLEASE TAKE NOTICE that Exxon Corporation,

Exxon Pipeline Company, Atlantie Richfield Company,

. ARCO Pipe Line Company, BP Alaska Inc., Sohio Alaska

50a

Petroleum Company, and Sohio Pipe Line Company

hereby appeal, pursuant to 28 U.S.C. Seetion 1257(2), to

the Supreme Court of the United States from the final

judgment and decision on appeal in this cage entered by

this court on August 16, 1985.

DATED this 5th day of November, 1985.

O'MELVENY & MYERS

JOHN F. DAUM

BARTON H. THOMPSON, JR.

RICHARD B. GOETZ

400 South Hope Street

Los Angeles, CA 90071

BARRY L. WERTZ

JANICE L. ROBERTSON

EXXON COMPANY, U.S.A.

800 Bell Avenue, 18th Floor

Houston, Texas 77002

THOMPSON & KNIGHT

J. W. BULLION

RALPH I. MILLER

3300 First City Center

Dallas, Texas 75201

ROBERT E. MCMANUS

ATLANTIC RICHFIELD COMPANY

1601 Bryan St., DAB 19054

Dallas, Texas 75221

HARTIG, RHODES, NORMAN,

MAHONEY & EDWARDS

ROBERT J. MAHONEY

717 “K” Street, Suite 201

Anchorage, Alaska, 99501

Attorneys for Exxon

Corporation and Exxon Pipe

Line Company

5la

By /s/Robert J. Mahoney

Robert J. Mahoney

FAULKNER, BANFIELD, DOOGAN &

HOLMES

WILLIAM B. ROZELL

JOHN F. CLouGH, III

302 Gold Street

Juneau, Alaska 99801

Attorneys for Atlantic

Richfield Company and

Areo Pipe Line Company

By /s/ William B. Rozell

William B. Rozell

SQUIRE, SANDERS & DEMPSEY

TERRENCE G. PERRIS

1800 Huntington Building

Cleveland, Ohio 44115

RICHARD H. HAHN

THE STANDARD OIL COMPANY

1725 Midland Bldg.

Cleveland, Ohio 44115

HUGHES, THORSNESS, GANTZ,

POWELL & BRUNDIN

RICHARD QO. GANTZ

CARL J.D. BAUMAN

509 West Third Avenue

Anchorage, Alaska 99501

Attorneys for Sohio Alaska

Petroleum Company, Sohio

Pipe Line Company,

BP Alaska Ine.

By /s/ Carl J.D. Bauman

Car! J.D. Bauman

52a

AFFIDAVIT OF SERVICE

STATE OF ALASKA )

j gs

THIRD JUDICIAL DISTRICT

Sally O'Donnell, being first duly sworn on oath, de-

poses and says:

1. I am over the age of eighteen years, and not a party

to or interested in the within action. My business address

is Denali Towers North, 2550 Denali Street, Suite 700,

Anchorage, AK 99503-2774. I am employed by Faulkner,

Banfield, Doogan & Holmes.

2. On this 6th day of November, 1985, I served the

within Notice of Appeal to the Supreme Court of the

United States upon all parties required to be served, to-

wit, by depositing a true copy thereof in the United States

mail box at Anchorage, Alaska, in a sealed envelope with

first-class postage prepaid and addressed to counsel of

record as follows:

Deborah Vogt Harold Brown

Assistant Attorney Attorney General

General State Capital

State Capitol Pouch K

Poueh K Juneau, Alaska 99811

Juneau, Alaska 99811

/s/_ Sally O'Donnell

SUBSCRIBED & SWORN TO before me this 6th day

of November, 1985.

/s/ Jan Cress

NOTARY PUBLIC for Alaska.

My Commission Expires:

October 25, 1988

53a

C. CONSTITUTIONAL PROVISIONS, STATUTES

AND REGULATIONS.

U.S. Constitution, Art. I, Section 8:

The Congress shall have Power...

To regulate Commerce with foreign Nations, and

among the several States, and with the Indian Tribes.

U.S. Constitution, Amendment XIV, § 1:

nor shall any State deprive any person of life, liberty,

or property, without due process of law; nor deny to any

persor within its jurisdiction the equal protection of the

laws.

AS 43.19.0100, Multistate Tax Compact, Art. IV:

1. As used in this Article, unless the context otherwise

requires:

(a) “Business income” means income arising from

transactions and activity in the regular course of the

taxpayer's trade or business and includes income

from tangible and intangible property if the aequisi-

tion, management, and disposition of the property

constitute integral parts of the taxpayer’s regular

trade or business operations.

9. All business ineome shall be apportioned to this

State by multiplying the income by a fraction, the numer-

ator of which is the property factor plus the payroll factor

plus the sales factor, and the denominator of which is

three.

AS 43.20, Net Income Taz Act:

See. 43.20.011(e). There is imposed for each taxable

year upon the entire taxable income of every corporation

54a

derived from sources within the state a tax consisting of a

normal tax equal to 5.4 pereent of taxable income, and a

surtax which is equal to 4.0 percent of taxable income,

except that the tax on a corporation doing business in the

state which derives income from the production or pipe-

line transportation of crude oil or natural gas in the state

shall be determined and paid in aecordance with AS

43.21.

See. 43.20.065. Allocation and apportionment. A tax-

payer who has income from business activity which is

taxable both inside and outside the state or income from

other sources both inside and outside the state shall

allocate and apportion his net income as provided in the

Multistate Tax Compact (AS 43.19), or as provided by

this chapter.

AS 43.21, Oil and Gas Corporate Income Taz:

See. 43.21.010. Appheation. This chapter applies to

every corporation doing business in the state which de-

rives income from the production of oil or gas from a lease

or property in the state or from the pipeline transporta-

tion of oil or gas in the state. The tax caleulated under

this chapter is measured by the total taxable income of

the corporation during the tax period as determined

under AS 43.21.020-43.21.040 and is caleulated at the

rates established under AS 43.20.011(e).

See. 43.21.020. Determination of taxable income from

oil and gas production. (a) The taxable income of a

corporation from the production of oil and gas from a

lease or property in the state shall be the corporation's

net income as calculated by the department in accordance

with this section.

(b) Gross ineome of a corporation from oil and gas

production shall be the gross value at the point of produc-

55a

tion of oil or gas produced from a lease or property in the

state. The department shall by regulation determine a

uniform method of establishing the gross value at the

point of production. In making its determination the

department may use the actual prices or values received

for the oil or gas, the posted prices for the oil or gas in the

same field, or the prevailing prices or values of oil or gas

in the same field. In addition, in its determination of

gross value at the point of production of oil or gas

produced from a lease or property, the department shall

determine the reasonable costs of transportation from the

point of sale to the point of production of the oil or gas.

Transportation costs set by a tariff properly on file with

the Alaska Pipeline Commission or other regulatory

agency shall be considered prima facie reasonable, but if a

tariff properly on file with a regulatory agency is subse-

quently amended, changed, or overturned retroactively,

the reasonable costs of transportation shall be recom-

puted for that period using the newly determined tariff.

determined by the department by deducting from gross

income the following:

(1) royalties paid in kind or in value;

(2) taxes imposed under AS 43.55 and AS 43.57

which are actually paid or ineurred by the corpora-

tion on the production from a lease or property in the

state;

(3) taxes imposed under AS 43.56 and AS 29.53

which are actually paid or incurred by the corpora-

tion on property used directly in the production of oil

or gas from a lease or property in the state, including

property used in production, gathering, treatment or

preparation of the oil or gas for pipeline transporta-

tion, but only if those property tax payments were

56a

due and payable only after the date of commercial

production from the lease or property with which the

property was associated;

(4) the direct costs ineurred by or for the corpora-

tion in operating the lease or property, including the

direct costs of producing, gathering, treating or pre-

paring the oil or gas for pipeline transportation, but

net of any payments received for those activities and

not ineluding any indirect cost or overhead expense;

(5) depreciation (using the unit of production

method or such other reasonable methods as the

department may by regulation establish) on property

used directly in the production, gathering, treatment

or preparation of the oil or gas for pipeline transpor-

tation including amortization of capitalized interest

for investments in this property at a rate not to

exceed the average cost of borrowed capital to the

taxpayer during the year in which it is eapitalized;

(6) the amortization of lease acquisition payments

and taxes paid or ineurred under AS 43.56 and AS

29.53 (ineluding eapitalized interest on both) for or

on producing properties before the commencement of

commercial production from the lease or property for

which the property is being used;

(7) interest expense of the corporation not ecapi-

talized during construction, that was paid or in-

curred in connection with property in Alaska;

however, unless (f) of this seetion applies, the inter-

est expenses may not exceed that portion of the total

interest paid by the consolidated business of which

the corporation is a part, determined by multiplying

the total interest by a fraction, the numerator of

which is the value of the ecorporation’s real and

tangible personal property used directly in the pro-

57a

duction of oil or gas from a lease or property in the

state and the denominator of which is the value of all

real and tangible personal property of the consoli-

dated business; in this subsection, ‘total interest

paid by the eonsolidated business” does not inelude

interest expense arising from intercompany obliga-

tions within the consolidated business except to the

extent that the interest expense reflects a pass-

through of interest on a third-party borrowing by the

parent or other member of the consolidated business

with the purpose, expressed at the time of the third-

party borrowing, of financing Alaska business activ-

ity of the taxpayer corporation;

(8) expenses ineurred by the corporation after

December 31, 1977 of unsuccessful exploration of oil

or gas in the state including the acquisition costs of

abandoned properties, dry hole costs, and the cost of

geologic and geophysical exploration related to those

abandoned properties;

(9) general overhead or administrative expense

ineurred by the corporation attributable to deriving

income from the production of oil or gas from a lease

or property in the state to the extent, except as

provided in (f) of this section, that it does not exceed

that portion of the total general overhead or adminis-

trative expense ineurred by the consolidated busi-

ness of which the corporation is a part, determined

by multiplying the total general overhead or adminis-

trative expense by a fraction, the numerator of which

is the value of the ecorporation’s real and tangible

personal property used directly in the production of

oil or gas from a lease or property in the state and

the denominator of which is the value of all real and

58a

tangible personal property of the consolidated

business;

(10) the amount of income from the production of

oil and gas from a lease or property that is divided

among the regional Native corporations under see.

7(i) of the Alaska Native Claims Settlement Act

(P.L. 92-203);

(11) the tax imposed by see. 4986 of the Internal

Revenue Code that is paid or incurred by the tax-

payer for oil production from leases or properties in

the state.

(d) Deductions from gross income under this section

shall not inelude expenses previously dedueted on a

return filed under AS 43.20.

(e) Where a corporation subject to this chapter shares

the production or proceeds of the production from a lease

or property through a working interest, royalty interest,

overriding royalty interest, production payment, net

profit interest, joint venture or other agreement, the

department shall allocate the deductions from gross in-

eome between the corporation and the persons with whom

it has such an agreement in accordance with the terms of

the agreement.

(f) If a corporation demonstrates to the satisfaction of

the department that it paid or incurred actual expenses

for interest or for general overhead or administration

attributable to deriving income from the production of oil

or gas from a lease or property in the state in an amount

greater than the amount determined under (¢)(7) or

(c)(9) of this section, the department may allow the

corporation to deduct the greater amount.

See. 43.21.0830. Determination of income from oil and

gas pipeline transportation. (a) Except as provided in

59a

(ec) of this seetion, taxable income attributable to the

transportation of oil in a pipeline engaged in interstate

commerce in Alaska shall be determined by the depart-

ment and shall be the amount reported or that would be

required to be reported to the Federal Energy Regulatory

Commission or its suecessors as net operating income,

less those portions of interest and general administrative

expense attributable to the pipeline transportation of oil

in the state, except that taxable income shall also inelude

taxes on or measured by income. The department shall

establish regulations governing the determination of in-

terest and general administrative expense attributable to

pipeline transportation of oil in the state.

(b) Exeept as provided in (c) of this section, taxable

income attributable to the transportation of natural gas in

a pipeline engaged in interstate commerce in Alaska shall

be determined by the department and shall be the amount

reported or that would be required to be reported to the

Federal Energy Regulatory Commission as net operating

income less that portion of interest and general adminis-

trative expense attributabie to pipeline transportation in

the state, except that the taxable income shall also in-

clude taxes on or measured by income. The department

shall establish regulations governing the determination of

interest and general administrative expense attributable

to pipeline transportation of natural gas in the state.

of oil or natural gas in Alaska of any corporation not

under the Federal Regulatory Commission jurisdiction,

or of a corporation under the jurisdiction of the Federal

Energy Regulatory Commission but not reporting the

operation of pipelines in Alaska separately from the

operation of pipelines elsewhere, shall be determined by

the department and shall be based upon an amount equal

60a

to that which would have been reported to the Federal

Energy Regulatory Commission under (a) of this section

in the ease of oil pipelines, or (b) of this section in the

ease of natural gas pipelines, had the corporation been, in

facet, under Federal Energy Regulatory C ommission juris-

diction for the taxable year and required to report on the

operation of Alaska pipeline separately from the opera-

ion of pipelines elsewhere.

See. 43.21.040. Determination of income from activi-

ties other than oil and gas production or pipeline trans-

portation. (a) Taxable income of a corporation subject to

this chapter form activities in this state other than the

production of oil or gas from a lease or property in the

state or the pipeline transportation of oil or gas in the

state shall be determined in accordance with the method

established in art. IV of AS 48.19.010 and in AS

43.20.071, as modified by (b) — (f) of this seetion.

(b) The total taxable income of the consolidated busi-

ness is its entire income less the portion of that entire

income attributable to woridwide production and pipeline

transportation of oil and gas. In this section,

(1) for a member of a consolidated business who is

required to file under the Internal Revenue Code,

‘entire income” means taxable income under Subtitle

F and chapter 1 of Subtitle A of the Internal Reve-

nue Code of 1954, as amended, except that those

provisions adopted after December 51, 1975, which

change or modify exemptions from tax are not

adopted by reference as a part of this section until

the second January 1 following the effective date of

the federal law;

(2) for a member of a consolidated business who is

not required to file under the Internal Revenue Code,

“entire income’ means book income, except that a

6la

taxpayer may elect to report his income as the in-

come would be determined under (1) of this

subsection.

(ec) The numerator and denominator of the property

factor, of the payroll factor and of the sales factor shall be

calculated without reference to that portion of property,

payroll or sales directly related to the production of oil or

gas from a lease of property in the state or the pipeline

transportation of oil or gas in the state.

(d) The value attributed to vessels transporting Alas-

kan oil or gas of the consolidated business which are not

owned or effectively owned by the consolidated business

shail be exeluded from the property factor.

See. 43.21.050. Assessment of income and tax. (a)

The department shall assess taxable income and the

amount of tax payable on that taxable income.

(b) On or before August 15 of each year the depar*

ment shall send to every corporation taxable under this

chapter a notice of assessment showing the amount of

income taxable under this chapter for the previous year

and the amount of tax payable on that taxable income.

(ec) For purposes of this chapter the department may

eombine taxable incomes of corporations subject to tax

under this chapter who are part of the same consolidated

business.

(d) If the methods of allocation and apportionment

provided in this chapter do not fairly represent the extent

of a ecorporation’s business activity in the state, the

corporation may petition for or the department may

require, in respect to all or any part of the corporation’s

business activity, if reasonable, the employment of any

method authorized under art. IV, see. 18, of the multi-

state tax compact (AS 43.19.010) to effectuate an equita-

62a

ble allocation and apportionment of a corporation’s

income. The commissioner shall inelude in his annual

report required in AS 43.21.110 a report on all relief

granted under this subsection, including for, each case a

statement of the changes in tax liability resulting from

the granting of relief, the tax years involved, and a

description of the method of determining taxable income

that was substituted for those provided in this chapter.

See. 43.21.060. Returns. On or before April 15 of

each year, a corporation subject to tax under this chapter

shall submit a return in a form preseribed by the depart-

ment setting out information required by the department

to determine taxable income. For purposes of this echap-

ter, the department may require corporations subject to

tax under this chapter who are part of the same consoli-

dated business to file a single return.

See. 43.21.070. Payment of tax. The tax levied under

this chapter is payable to the department; on or before

September 30 of each year or in installments, including

prepayments of estimated tax, at the times and under the

eonditions the department may by regulation require.

This tax is payable on the due date set out in this section

even though the assessment is under appeal or the valid-

ity, enforceability or application of this chapter or any

provision of this chapter is challenged before the depart-

ment or in the courts.

See. 43.21.080. Transitional rules. The department

shall provide by regulation transition rules for corpora-

tions subject to tax under ch. 20 of this title before the

effective date of this Act to avoid double taxation of the

same income or double deduction of the same expense of

those corporations as a result of becoming subject to tax

under this chapter.

63a

See. 43.21.090. Regulations. The department may

adopt regulations in accordance with the Administrative

Procedure Act (AS 44.62) as appropriate to administer

and enforce this chapter.

See. 43.21.100. Penalties. The penalties established

in ch. 20 of this title apply to this chapter.

See. 43.21.110. Publie reporting. (a) The commis-

sioner of revenue shall compile and transmit to the legis-

lature an annual consolidated report of state revenues

and taxation policies under this chapter. This report shall

include total aggregate income tax paid by corporations

eovered under this chapter and aggregate income and

deductions by eategory, so classified as to prevent the

identification of particular returns or reports.

(b) The legislative auditor shall transmit to the legisla-

ture an annual report reviewing the actions of the depart-

ment in administering this chapter.

See. 43.21.120. Definitions. Unless the context re-

quires otherwise the definitions contained in AS 43.55.140

are applicable to this chapter. In addition, in this chapter

(1) “base of operations” means the closest point

on land to the offshore oil or gas production opera-

tions from which goods, services and supplies flow to

those offshore oil or gas production operations;

(2) “eonsolidated business” means a corporation

or group of corporations having more than 50 percent

common ownership, direct or indirect, or a group of

corporations in which there is common control either

direct or indirect as evidenced by any arrangement,

contract or agreement.

AS 44.62.240:

ey —————————————eeEe

64a

If a regulation adopted by any agency under this

chapter is primarily legislative, the regulation has pro-

spective effect only. A regulation adopted under this

chapter, which is primarily an “interpretative regulation, ”

has retroactive effect only if the ageney adopting it has

adopted no earlier inconsistent regulation and has fol-

lowed no earlier course of conduct ineonsistent with the

regulation. Silence or failure to follow any course of

conduct is considered earlier inconsistent conduct.

AS 44.62.640:

In AS 44.62.010—44.62.320, unless the context other-

wise requires,

(2) “regulation” means every rule, regulation, order,

or standard of general application or the amendment,

supplement or revision of a rule, regulation, order or

standard adopted by a state agency to implement, inter-

pret, or make specific the law enforced or administered by

it, or to govern its procedure, except one which relates

only to the internal management of a state agency; “regu-

lation” does not inelude a form prescribed by a state

agency or instructions relating to the use of the form, but

needed to implement the law under which the form is

issued; “regulation” ineludes “manuals,” “policies,” “‘in-

structions,” “guides to enforcement,” “interpretative bul-

letins,” “interpretations,” and the like, which have the

effect of rules, orders, regulations or standards of general

application, and this and similar phraseology shall not be

used to avoid or ecireumvent this chapter; whether a

regulation, regardless of name, is covered by this chapter

depends in part on whether it affeets the public or is used

by the ageney in dealing with the public.

65a

CHAPTER 21.

OIL AND GAS CORPORATE INCOME TAX

REGULATIONS

Article

1. Application of Tax

(15 AAC 21.001 — 15 AAC 21.090)

2. Taxable Income from Oil and Gas Production

(15 AAC 21.100 — 15 AAC 21.290)

3. Taxable Income from Oil and Gas Pipelines

(15 AAC 21.300 — 15 AAC 21.490)

4. Taxable Income Apportioned to Alaska

(15 AAC 21.500 — 15 AAC 21.590)

Transition Rules

(15 AAC 21.600 — 15 AAC 21.690)

6. Administration

(15 AAC 21.700 — 15 AAC 21.890)

General Provisions

(15 AAC 21.900 — 15 AAC 21.9790)

ARTICLE 1.

APPLICATION OF TAX

Section

l. Findings of fact

3. Determinations based on findings of fact

Requirement of alternative allocation and apportionment

method

10. Persons subject to this chapter

20. Taxpayers having income from other activities

30. Consolidated businesses

40. Attribution of income

50. Net taxable income

60. Surtax exemption

65. Tax rates

70. Treatment of net losses realized under this chapter

80. (Reserved)

90. (Reserved)

15 AAC 21.001. FINDINGS OF FACT. Based upon

the entire legislative history culminating in the passage of

66a

eh. 110, SLA 1978, and also the legislative history of ch.

113, SLA 1980, and ech. 116, SLA 1981, and, after review-

ing in depth the tax returns of corporations engaged in oil

and gas production or pipeline transportation jn the state,

the department finds that

(1) the three-factor formula set out in AS 43.19.010,

Art. IV, does not fairly or fully represent the income-

producing activity in the state or the income earned in the

state of corporations engaged in oil and gas production or

pipeline transportation in the state;

(2) specifieally, the property factor, payroll factor, and

sales faetor in combination do not accurately represent

the value of aetivity relating to or associated with the

extraction and transportation of nonrenewable resources

of oil and gas in the state; and

(3) the application of the three-factor formula in AS

3.19.010, Art. IV, results in a total distortion of the

income-produeing activities and income earned by corpo-

rations engaged in oil and gas production and pipeline

transportation because little weight is given to the tre-

mendous raw wealth represented by the oil and gas

produced from a lease or property in the state or trans-

ported in the state, or both. (Eff. 2/22/79, Reg. 69; am

5/21/81, Reg. 78; am 3/26/82, Reg. 81)

Authority: AS 43.05.010; AS 43.05.080; AS 43.19.010 (Art.

IV, see. 18); AS 43.20.065; AS 44.25.020.

15 AAC 21.063. DETERMINATIONS BASED ON

FINDINGS OF FACT. Under AS 43.19.010, Art. IV, see.

18, and based upon the findings contained in 15 AAC

21.001 for the purpose of the tax imposed under AS 43.21,

the department has determined that

(1) the alloeation and apportionment provisions of AS

43.19.010, Art. IV, sees. 1-17, do not fairly or fully

67a

represent the extent of a corporation’s business activities

in the state with respect to the production or pipeline

transportation of oil or gas in the state; and

(2) the method of alloeation and apportionment

adopted by the legislature in AS 43.21 more accurately

represents the extent of business activity of corporations

engaged in oil and gas production, pipeline transporta-

tion, or both, in the state, than do the allocation and

apportionment provisions of AS 43.19.010, Art. IV, sees.

1-17. (Eff. 2/22/79, Reg. 69; am 5/21/81, Reg. 78; am

3/26/82, Reg. 81)

Authority: AS 43.05.010; AS 43.05.080; AS 43.19.010 (Art.

IV, see. 18); AS 43.20.065; AS 44.25.020.

15 AAC 21.005. REQUIREMENT OF ALTERNA-

TIVE ALLOCATION AND APPORTIONMENT

METHOD. Pursuant to AS 43.19.0100, Art IV, see. 18, and

based upon the findings and determinations in 15 AAC

21.001 and 15 AAC 21.003, a corporation doing business

in the state which derives income from the production of

oil or gas from a lease or property in the state, or from the

pipeline transportation of oil or gas in the state, or both,

shall compute its income under the methods prescribed in

AS 43.21 and this chapter. (Eff. 2/22/79, Reg. 69; am

5/21/81, Reg. 78)

Authority: AS 43.05.010; AS 43.05.080; AS 43.19.010

(Art. IV, See. 18); AS 43.20.065; AS 44.25.020

15 AAC 21.010. PERSONS SUBJECT TO THIS

CHAPTER. (a) A corporation doing business in the state

and deriving income from one or more of the following

souces is subject to the provisions of this chapter, even if

that income is more than offset during a year by expenses

associated with it:

68a

(1) a production interest in one or more leases or

properties in commercial production that are within the

state; or

(2) repealed 5/21/81; t

(3) the transportation of oil or gas or both by means of

a pipeline or pipeline system of which part or all is within

the state.

(b) The right under see. 7(i) of the Alaska Native

Claims Settlement Act to share in revenue from oil or gas

production from a regional Native corporation's land is

not-a production interest in that property, and therefore a

corporation deriving income from oil and gas production

solely by virtue of sees. 7(i) and 7(}) of the Alaska Native

Claims Settlement Act is not subject to the provisions of

this chapter. (Eff. 2/22/79, Reg. 69; am 5/21/81, Reg. 78;

am 3/26/82, Reg. 81)

Authority: AS 43.05.010; AS 43.05.080; AS 43.19.010

(Art. IV, see. 18); AS 43.21.010; AS 43.21.020; AS

43.21.090; AS 44.25.020.

15 AAC 21.020. TAXPAYERS HAVING INCOME

FROM OTHER ACTIVITIES. A taxpayer deriving in-

come from one or more sources in addition to any of those

listed in 15 AAC 21.010 is subject to the requirements and

income tax liability under AS 43.21 and this chapter only,

for all of its income. (Eff. 2/22/79, Reg. 69)

Authority: AS 43.05.080; AS 43.19.010 (Art. IV, see. 18);

AS 43.20.011; AS 43.21.010; AS 43.21.040; AS 43.21.090.

15 AAC 21.030. CONSOLIDATED BUSINESS. (a) A

group of two or more corporations that are directly or

indirectly controlled or more than 50-perecent »wned (di-

rectly or through one or more intermediaries) by one

69a

common person (corporate or otherwise) is a consoli-

dated business for purposes of this chapter.

(b) The ineome, expenses, and assets of a consolidated

business inelude, respectively, ail ineeme, expenses and

assets attributed to it under 15 AAC 21.040.

(ec) If a corporation or consolidated business is con-

trolled (by a means characteristic of ownership rather

than through the exercise of general governmental powers

such as laws, regulations, judicial decisions, proclama-

tions, and the like) or more than 50-percent owned by a

sovereign, head of state, government or governmental

agency, the consolidated business does not include the

sovereign, head of state, government or governmental

ageney for purposes of this chapter. (Eff. 2/22/79, Reg.

69; am 5/21/81, Reg. 78)

Authority: AS 43.05.080; AS 43.19.010 (Art. IV, see. 18);

AS 43.21.050; AS 43.21.090; AS 43.21.120.

15 AAC 21.040. ATTRIBUTION OF INCOME. (a) The

income, expenses and assets of an enterprise involving

undivided joint ownership must be attributed to the joint

owners of that enterprise on the basis of their respective

ownership interests, as may be modified by agreement

among those joint owners. For purposes of this section,

partnerships, joint ventures, trusts with joint benefi-

ciaries and similar legal entities (but not a corporation)

are enterprises involving undivided joint ownership.

(b) If a eorporation doing business in the state con-

duets, through one or more noncorporate intermediaries,

operations that generate income for those intermediaries

which would make them subject to tax under AS 43.21

and this chapter if they were corporations, then that

corporation is presumed to derive income from those

operations in the amount of the income earned by those

70a

intermediaries and therefore subject to tax under this

chapter. Such a corporation’s tax is calculated using the

revenues and deductions of the intermediaries, as if the

corporation were directly conducting the operations actu-

ally conducted by the intermediaries. (Eff. 2/22/79, Reg.

69)

Authority: AS 43.05.080; AS 43.19.010 (Art. IV, see. 18);

AS 43.21.050; AS 43.21.090; AS 43.21.120.

15 AAC 21.050. NET TAXABLE INCOME. (a) A

taxpayer's 5.4-percent tax and 4-percent surtax under AS

43.21 and this chapter for a year are on the taxpayer’s net

taxable income for that year as determined under (b) of

this section, except that the surtax will be computed on

that net taxable income minus the surtax exemption

specified in 15 AAC 21.060.

(b) A taxpayer’s net taxable income for a year is that

taxpayer’s taxable production income under 15 AAC

21.100 for that year, plus that taxpayer’s taxable oil

pipeline income under 15 AAC 21.300 for that year, plus

that taxpayer’s taxable gas pipeline income under 15 AAC

21.400 for that year, plus that taxpayer’s taxable appor-

tioned income under 15 AAC 21.500 for that year, and

minus all net losses of that taxpayer that are being

carried back or carried forward to that year from one or

more other tax years in accordance with 15 AAC 21.070.

If the taxpayer’s income under one or more of 15 AAC

21.100, 15 AAC 21.300, 15 AAC 21.400 and 15 AAC 21.500

reflects a loss, the total of the losses under those sections

is offset against the total gain (if any) under the rest of

those sections. (Eff. 2/22/79, Reg. 69)

Authority: AS 43.05.0800; AS 43.19.010 (Art. IV, see. 18);

AS 43.20.011; AS 438.21.010; AS 43.21.020; AS 43.21.0380;

AS 43.21.0400; AS 43.21.050; AS 43.21.090.

Tla

15 AAC 21.060. SURTAX EXEMPTION. A taxpayer's

surtax exemption shall be calculated in accordance with

AS 43.20.011(e) and AS 43.20.021(a). The surtax exemp-

tion for tax year 1978 is $50,000. The surtax exemption, if

any, for tax years after 1978 will be an amount deter-

mined under AS 43.20. (Eff. 2/22/79, Reg. 69)

Authority: AS 43.05.080; AS 43.19.010 (Art. IV, see. 18);

AS 43.20.011; AS 43.20.021; AS 43.21.010; AS 43.21.050;

AS 43.21.090.

15 AAC 21.065. TAX RATES. Tax obligations arising

under AS 43.21 and this chapter for tax years beginning

before January 1, 1981, must be computed by using the

surtax exemption allowed by 15 AAC 21.060 and the rates

set out in 15 AAC 21.050. For tax years beginning after

December 31, 1980, the tax rate schedule set out in AS

43.20.011 as reenacted by ch. 116, SLA 1981, must be

used to compute tax obligations arising under AS 43.21

and this chapter without regard to the tax rates set out in

15 AAC 21.050 and the surtax exemptions allowed by 15

AAC 21.060. (Eff. 3/26/82, Reg. 81)

Authority: AS 43.05.080; AS 43.19.010 (Art. IV, see. 18);

AS 43.20.011; AS 43.21.010; AS 43.21.020; AS 43.21.030;

AS 43.21.040; AS 43.21.050; AS 43.21.090.

15 AAC 21.070. TREATMENT OF NET LOSSES

REALIZED UNDER THIS CHAPTER. (a) A taxpayer

realizes a net loss under this chapter if the taxpayer’s net

taxable income under 15 AAC 21.050 for that year is less

than zero.

(b) A taxpayer’s net loss may be carried back not more

than three tax years before the tax year for which it is

realized (but in no event before the 1978 tax year) and

may be earried forward, if necessary, as far as the 15th

tax year following the tax year for which it is realized.

72a

This carrying back and carrying forward must be on a

first-in, first-out basis; that is, the tax loss must first be

earried back as an offset against the taxpayer’s net

taxable income, if any, for the third preceding tax year,

and any remaining tax loss must next be applied as an

offset against the taxpayer’s net taxable income, if any,

for the second preceding tax year, and so on until either

the tax loss is fully used as offsets against the taxpayer's

net taxable income under AS 43.21 and, after December

31, 1981, AS 43.20 or until it has been carried forward

into the 15th year following the tax year in which the net

loss is realized. Any net loss from a tax year still remain-

ing after the 15th following tax year will be lost.

(ec) Ifa taxpayer has net losses from more than one tax

year that may be applied as offsets against the taxpayer's

net taxable income for the same tax year, the net loss

from the earliest of those tax years must first be applied,

then the net loss from the second earliest of those tax

years must be applied, assuming that the earliest tax loss

does not fully offset the net taxable income against which

it is applied, and so on. (Eff. 2/22/79, Reg. 69; am

3/26/82, Reg. 81)

Authority: AS 43.05.080; AS 43.19.010; (Art. IV, see.

18); AS 43.21.020; AS 43.21.090.

15 AAC 21.080 — 15 ACC 21.090. Reserved.

OIL

Seetion

100.

110. Gross prod

120. Value at th

122. Sales price

124.

125.

128.

130.

140.

150. (Reserved)

160. (Reserved)

170. (Reserved)

180. (Reserved)

190. (Reserved)

200.

general

210. Deduction

215. Deduction

220. Deduction

230. Deduction

235. Deduction

240. Deduction

250. Deduction

260. Deduction

i3a

ARTICLE 2.

TAXABLE INCOME FROM

AND GAS PRODUCTION

Taxable production income

uction revenue

e point of production

Prevailing value for oil

Prevailing value for gas

Choice of methods for determining reasonable

eost of tranportation

Calculation of reasonable costs of transportation

Extraordinary production revenue (or loss)

Deductions from gross production revenue — In

for royalty

for Native corporation revenue sharing

for production taxes

for ad valorem taxes

for erude oil windfall profit tax

for direct operating costs

for acquisition costs

for development costs

aoe

T4a

270. Deduction for expioration costs

280. Deduction for uncapitalized interest

290. Deduction for general overhead and administra-

tive expense

15 AAC 21.100. TAXABLE PRODUCTION _IN-

COME. A taxpayer’s taxable production income during

a year equals the total of the taxpayer’s gross production

revenue (determined in accordance with 15 AAC

21.100 — 15 AAC 21.130) during that year for each lease

or property in the state in which the taxpayer has a

production interest, plus the total of the taxpayer’s ex-

traordinary production revenue (determined in accor-

dance with 15 AAC 21.140), if any, during that year for

each lease or property in the state in which the taxpayer

has a production interest, minus the total of the tax-

payers deductions for that year under 15 AAC

21.200 — 15 AAC 21.290, and minus the total of the

taxpayer's extraordinary production loss (determined in

accordance with 15 AAC 21.140), if any, during that year

for each lease or property in the state in which the

taxpayer has a production interest. (Eff. 2/22/79, Reg.

69)

Authority: AS 43.05.080; AS 43.19.010; (Art. IV, see.

18); AS 43.21.020; AS 43.21.090.

15 AAC 21.110. GROSS PRODUCTION REVENUE.

A taxpayer’s gross production revenue during a year from

a production interest in a lease or property is the value at

the point of production of the taxpayer's gross share of

the oil and gas produced from (or allocated to) that lease

or property; however, oil or gas that is used, flared or

unavoidably lost in the production operations for the

lease or property or is injected into a reservoir in the

course of the operations for the same field, may not be

included in determining the taxpayer's gross production

75a

revenue from that or any other lease or property. (Eff.

2/22/79, Reg. 69)

Authority: AS 43.05.080; AS 43.19.010; (Art. IV, see.

18); AS 48.21.020; AS 43.21.090.

15 AAC 21.120. VALUE AT THE POINT OF PRO-

DUCTION. (a) The gross value at the point of production

for a taxpayer’s oil or gas equals the sales price under 15

AAC 21.122 for that oil or gas, less the taxpayer’s reason-

able costs of transportation under 15 AAC 21.128 and 15

AAC 21.130 for that oil or gas from its point of produe-

tion to its sales delivery point, and less the taxpayer's

reasonable costs (not otherwise deducted under this

chapter) incurred downstream of the point of production

for processing, conditioning, and preparing gas and gas

plant liquids for sale; unless

(1) subsection (b) of this section applies, in which

case the gross value at the point of production for that oil

or gas is the prevailing value under 15 AAC 21.124 or 15

AAC 21.125 for that oil or gas, less the reasonable costs of

transportation under 15 AAC 21.128 and 15 AAC 21.130

for that oil or gas from its point of production to its sales

delivery point (or, if different, to the point where prevail-

ing value is caleulated under 15 AAC 21.124 or 15 AAC

21.125) and less the taxpayer’s reasonable costs incurred

downstream of the point of production for processing,

conditioning, and preparing gas and gas plant liquids for

sale; or

(2) the gross value at the point of production for the

taxpayer's oil or gas would exceed the applicable maxi-

mum lawful price (if any) set by the U.S. Department of

Energy, the Federal Energy Regulatory Commission, an-

other governmental agency or a court of law (adjusted for

any changes in value because of any processing, condi-

tioning, preparation, and transportation of that oil or gas

76a

occurring between its point of production and the point at

which the applicable maximum lawful price is effective) in

which ease the gross value at the point of production is

that applicable maximum lawful price as adjusted for the

changes in value. ’

(b) Prevailing value under 15 AAC 21.124 and 15 AAC

21.125 must be used in determining the gross value at the

point of production for a taxpayer’s oil or gas if

(1) the circumstances relating to the disposition of the

taxpayer’s oil or gas show fraud or an intent to evade

taxes; or

(2) the sales price under 15 AAC 21.122 for that oil or

gas is substantially lower (determined by analyzing the

cash value of the consideration received for that oil or gas

and the degree of difference between the prevailing value

and the sales price for that oil or gas, the quantity of oil

or gas involved in the transaction, and the duration of the

transaction) than the prevailing value under 15 AAC

21.124 and 15 AAC 21.125 for that oil or gas, and one or

more of the following conditions exist:

(A) the contract under which the taxpayer’s oil or

gas is sold or exchanged is executed or renegotiated

after December 31, 1979, and either sets a price for

that oil or gas without adjustments tied to market

conditions, or does not provide for later renegoti-

ation of prices at market rates;

(B) the contract sets a price which does not rea-

sonably reflect market conditions for production

from that field or area prevailing at the time the

‘contract is executed or renegotiated; or

oil or gas is sold or exchanged reflects an unusually

weak bargaining position on the taxpayer's part be-

77a

eause of circumstances which the taxpayer could

reasonably have foreseen and taken steps to amelio-

rate or avoid.

21.124, 15 AAC 21.125 and 15 AAC 21.900, the terms

“exchange” and “exchanged” do not include transactions

where a taxpayer transfers oil to a third party at the Port

of Valdez or at another port in Alaska for purposes of

operational necessity or convenience in what otherwise

would be a bona fide, arm’s-length exchange but for the

fact that at the time of the particular transfer the tax-

payer expects subsequently to receive a like amount of

similar quality oil from that third party at the same port.

Such a transfer to a third party and the subsequent

transfer from the third party, when they occur, will be

disregarded and the oil subject to that transfer will be

treated as if it had remained in the possession of the

transferring taxpayer pending final disposition of that oil.

(Eff. 2/22/79, Reg. 69; am 5/21/81, Reg. 78)

Authority: AS 43.05.080; AS 43.19.010; (Art. IV, see.

18); AS 43.21.020; AS 43.21.090; AS 43.21.120

15 AAC 21.122. SALES PRICE. (a) The sales price for

purposes of this chapter for first sales of a taxpayer's oil

or gas to one or more third parties is the eash value of the

full consideration being given in receipt for that oil in

those sales.

(b) If a taxpayer’s oil or gas is being sold to an

affiliate of that taxpayer (as opposed to being transferred

from one division to another within the same corporate

person), the sales price of that oil or gas for purposes of

this chapter is the greater of

(1) the eash value of the full consideration given in

receipt for the oil or gas so sold; or

78a

(2) the price attributable to that sale which is entered

on the taxpayer’s books and records in accordance with

generally accepted accounting principles, consistently

applied.

payer or is transferred from the production division to

another division within the same corporate person, the

sales price of that oil or gas for purposes of this chapter is

the price attributable to the production division for that

oil or gas which is entered on the taxpayer’s books and

records in accordance with generally accepted accounting

principles, consistently applied.

(d) If a taxpayer exchanges oil or gas with a third

party, the sales price of that oil or gas for purposes of this

chapter is

(1) the price prescribed in the exchange agreement for

the taxpayer’s oil or gas for purposes of settling accounts

and eashing out any net exchange balances in the tax-

payer’s favor (to illustrate what is meant by a net ex-

change balance in he taxpayer’s favor, suppose the

exchange is for oil on a barrel-for-barrel basis and the

taxpayer’s volume to the third party exceeds the volume

received from the third party: the amount of that excess

would be the net exchange balance in the taxpayer's

favor); or

(2) if there is no such price prescribed in the exchange

agreement, the price attributable to the oil or gas received

by the taxpayer which is entered on the taxpayer’s books

in accordance with generally accepted accounting princi- |

ples, consistently applied. (Eff. 5/21/81, Reg. 78)

Authority: AS 43.05.080; AS 438.19.010 (Art. IV, see.

18); AS 43.21.020; AS 43.21.090; AS 43.21.120.

79a

15 AAC 21.124. PREVAILING VALUE FOR

OIL. (a) For a taxpayer’s oil, the prevailing value for

purposes of this chapter is the arithmetic average acquisi-

tion cost C.I.F. (at the refinery inlet in the same market

in which the taxpayer’s Alaskan oil is refined) based on

the sales price of like oil sold in up to three third-party,

arm’s-length transactions selected by the department, if

disclosure of the sales price information is permitted by

the parties to those transactions at the time of an audit of

the taxpayer. In this subsection, “like oil’’ means an oil of

substantially similar quality produced in the same general

area of the state and subject to the same federal price

controls, if any, as the oil for which the prevailing value is

to be determined.

(b) If the information under (a) of this section may

not be disclosed or is unavailable, then the prevailing

value for purposes of this chapter equals the arithmetic

average acquisition cost C.I.F. (at the refinery inlet in the

same market in which the taxpayer’s Alaskan oil is re-

fined) of up to six oils selected by the department

including

(1) up to three domestie oils of substantially similar

quality which are sold in significant quantities in the same

market or near the same market; and

(2) up to three imported oils of substantially similar

quality which are sold in significant quantities in the same

market or near the same market.

ery inlet in a market for each of the sources of oil used in

this seetion equals the sum of

(1) the respective official government sales price or

posted price of the oil (with adjustments for differentials

and sureharges) appearing in the latest Platt’s Oilgram

Oooo

80a

Price Report published on or before the last day of a

month; plus

(2) the respective tanker transportation cost of the oil

from its port of origin to ship’s rail in the same market as

that in which the taxpayer’s Alaskan oil is refined, to be

caleulated

(A) by multiplying the London Tanker Broker’s

average freight rate assessment (“AFRA”’) applica-

ble to that voyage during that month for AFRA LR 2

(Long range 2) oil tankers, by the most recently

published Worldseale rate for that voyage; or

(B) by applying another applicable freight rate if

foreign flat vessels are prohibited from transporting

that oil; plus

(3) any canal tolls and expenses not included in the

applicable freight rate for that voyage; plus

(4) pipeline or other carrying charges. (Eff. 5/21/78)

Authority: AS 43.05.080; AS 43.55.020(f); AS 43.55.110

15 AAC 21.125. PREVAILING VALUE FOR

GAS. For a taxpayer’s gas, the prevailing value for pur-

poses of this chapter is

(1) the volume-weighted average of the prices received

under the terms of sales contracts for significant quanti-

ties which have been entered into or whose pricing provi-

sions have been amended during the tax year or the two

preceding years at the sales delivery points within the

_ same market for that production by the taxpayer in arm’s-

length sales transactions for like kind, character, and

_ quality Alaskan gas produced during the month; or

(2) if the taxpayer makes no arm’s-length sales of

significant quantities at the sales delivery points within

8la

the same market for like kind, character, and quality

Alaskan gas produced during the month, the volume-

weighted average of the prices under the terms of arm’s-

length sales contracts for significant quantities of gas

from the same field as the taxpayer’s gas (whether be-

tween third parties or not) which were entered into or the

pricing provisions of which were amended during the tax

year or the two preceding years (or if there are no

contracts which comply with this paragraph for that field,

eontracts which comply with this paragraph in the nearest

field to that field), with appropriate adjustments for

differences, if any, in kind, character, and quality between

gas sold under the reference sales contracts and the

taxpayer's gas. (Eff. 5/21/81, Reg. 78)

Authority: AS 43.05.0080; AS 43.19.010 (Art. IV, see.

18); AS 43.21.020; AS 43.21.090; AS 43.21.120.

15 AAC 21.128. CHOICE OF METHODS FOR DE-

TERMINING REASONABLE COST OF TRANSPOR-

TATION. The reasonable cost of transportation is the

actual cost of transportation as determined in 15 AAC

21.180(a) and (b). However, the reasonable cost of trans-

portation is the fair market value as defined in 15 AAC

21.130(e) if the department determines that all of the

following conditions exist:

(1) the parties to the transportation of oil or gas are

affiliated;

(2) the contract for the transportation of oil or gas is

not an arm’s-length transaction or is not representative of

the market value of the transportation at the time the

contract was executed or renegotiated; and

(3) the method of transportation of oil or gas is not

reasonable in view of the existing alternative methods of

82a

transportation at the time the taxpayer entered into the

transportation commitment. (Eff. 5/21/81, Reg. 78)

Authority: AS 43.05.080; AS 43.19.010, (Art. IV, see.

18); AS 43.21.020; AS 43.21.090; AS 43.21.120. — ,

15 AAC 21.130. CALCULATION OF REASONABLE

COSTS OF TRANSPORTATION. (a) Reasonable costs

of transportation are caleulated from the point of produe-

tion to the sales delivery point.

(b) Actual costs of transportation for purposes of 15

AAC 21.128 are

(1) if the transportation of oil or gas is by a regulated

earrier, the tariff on file with FERC or other regulatory

agency having Jurisdiction that applies to that transporta-

tion of the oil or gas by the earrier, from the point that oil

or gas is tendered into the facilities of the earrier to the

point that it is delivered from the facilities of the carrier;

(2) if transportation of oil is by a tanker or other

vessel that is not owned or effectively owned by the

taxpayer

(A) for a single voyage charter, the charter fee for

that vessel, plus any voyage and port costs not

ineluded in that fee which are incurred with respect

to that transportation during the term of the charter

and which are borne by the taxpayer, plus the posi-

tioning cost, if any, borne by the taxpayer for that

vessel;

(B) for a voyage charter or a time charter, the

charter fee for that vessel, plus any voyage and port

costs not ineluded in that fee which are incurred with

respect to that transportation during the term of the

charter and which are borne by the taxpayer, plus the

positioning cost (amortized over the lesser of 36

83a

months or the term of the charter in the ease of a

time charter, and amortized on the basis of the

number of voyages in the ease of a consecutive

voyage charter), if any, borne by the taxpayer for

that vessel; or

ment fee specified in that contract, plus any voyage

and port costs and any positioning costs not included

in that fee which are ineurred with respect to that

transportation during the term of the contract of

affreightment which are borne by the taxpayer;

(3) if transportation of oil is by a tanker or other

vessel that is owned or effectively owned by the taxpayer,

the taxpayer’s actual cost for that transportation, which is

the sum of

(A) voyage and port costs incurred with respect

to that transportation;

(B) the positioning cost, amortized over 36

months, for that vessel;

actually owned by the taxpayer, depreciation must be

ealeulated in accordance with the applicable FASB

Financial Accounting Standards for this asset; if the

vessel is effectively owned by the taxpayer, deprecia-

tion must be calculated in accordance with FASB-13

from the standpoint of a lessee under a capital lease;

and

(D) an amount which, when added to the amount

of depreciation included under (C) of this para-

graph, will provide a reasonable return on the aequi-

sition cost of the vessel over its expected life; for

purposes of this subparagraph

84a

(i) ‘“aequisition cost” means the cost of the

vessel which may be capitalized by its actual owner

in accordance with generally accepted accounting

principles, including costs of improvements made

after the date the vessel is placed in servie¢e by or

on behalf of the taxpayer; and

(ii) “expected life’’ means the period of time

used to caleulated depreciation under (C) of this

paragraph;

(4) in the ease of transportation of gas as LNG

(A) if only a part of the LNG transportation

facilities are subject to tariff regulations by FERC or

other agencies of the United States, state or territory

or a possession of the United States or a foreign

nation and if the taxpayer does not have or effectively

have any ownership interest in the LNG transporta-

tion facility, the amount charged to the taxpayer for

that LNG transportation;

(B) if the taxpayer has or effectively has an own-

ership interest in the LNG transportation facility,

the taxpayer’s actual cost for that transportation

whieh is sum of

(i) the direct operating costs of the LNG trans-

portation facility (in the ease of an LNG tanker,

its respective voyage and port costs) ineurred with

respect to the taxpayer's gas;

(ii) the positioning cost, amortized over 36

months, for that vessel;

(iil) depreciation of the LNG transportation

facility, if the facility is actually owned by the

taxpayer, depreciation must be ealeulated in accoi-

dance with the applicable FASB Financial Ac-

85a

counting Standards for the owner of these assets;

if the LNG transportation facility is effectively

owned by the taxpayer, depreciation must be ealeu-

lated in aecordance with FASB-13 from the stand-

point of a lessee under a capital lease; and

(iv) an amount which, when added to the

amount of depreciation allowed under (iii) of this

subparagraph, provides a reasonable return on the

acquisition cost of the LNG transportation facility

over its expected life, for purposes of this sub-sub-

paragraph “aequisition cost” means the cost of the

LNG transportation facility which may be ecapital-

ized by its actual owner in aecordance with gener-

ally accepted accounting principles, including the

cost of improvements made after the date the LNG

transportation facility is placed in service by or on

behalf of the taxpayer, and “expected life’ means

the period of time used to caleulate depreciation

under (iii) of the subparagraph;

(5) If the transportation of oil or gas is by a nonregu-

lated pipeline facility that is not owned or effectively

owned by the producer of that oil or gas, the transporta-

tion fee specified in the contract plus any other costs not

included in the fee with respect to that transportation

which are borne by the producer;

(6) if the transportation of oil or gas is by a nonregu-

lated pipeline facility that is owned or effectively owned

by the producer of that oil or gas, the amount which would

have been reported to the FERC or other regulatory

ageney having jurisdiction applicable to the transporta-

tion of oil or gas under (1) of this subsection if the

transportation had been under the jurisdiction of FERC

or other regulatory agency for the tax reporting period.

86a

purpose of determining the reasonable cost of transporta-

tion under 15 AAC 21.128 is determined

(1) for shipments of oil, on the basis of third-party

charters (that is, time charter in which the taxpayer does

not own or effectively own the vessel) of like vessels of

one year or more, plus regulated transportation costs

determined under (b) (1) of this seetion; two vessels will

be considered like vessels for purposes of comparing like

transportation under this chapter if the difference be-

tween them in tonnage is less than 10,000 deadweight

tons and if they are both Jones Act vessels, or are both

CDS/ODS vessels, or

(2) for shipments of gas as LNG, on the basis of third-

party charters or leases (that is, charters or leases in

which the taxpayer does not own or effectively own the

LNG transportation facility in question) of three years or

more which are reported to the department for like LNG

transportation facilities, plus regulated transportation

eosts determined under (b)(1) of this section.

(d) If a taxpayer sells its oil or gas to a third party in

what would otherwise be a bona fide, arm’s-length sale but

at the time of the sale the taxpayer expects to repurchase

that oil or gas at a later time and place, then that sale to

the third party and the repurchase from the third party,

when it oeceurs, will be disregarded and the oil and gas

subject to that sale will be treated as if it has remained

the taxpayer's own oil or gas throughout the time between

that sale and repurchase. In determining the value at the

point of production in this ease, the reasonable cost of

transportation between the point of sale for that sale and

the point of repurchase must be determined as if the

taxpayer were the shipper. This subsection does not apply

if the taxpayer’s expected repurchase does not occur.

87a

(e) For purposes of this section, “voyage and port

costs” for a vessel are

(1) costs actually ineurred for fuel for the vessel while

in port and at sea, stores and provisions for the vessel and

captain and crew, wages and benefits of the vessel’s

captain and crew, routine maintenance, port and dock

fees, storage costs, demurrage, tug and pilotage fees,

marine agent's fees in port, lightering, trans-shipment

charges, customs fees and duties, regular and customary

gratuities which are lawfully paid, insurance premiums

paid to third-party insurers, minor cargo losses or mea-

suring differentials, loading and unloading inspection

fees, Panama Canal transit fees, a reasonable manage-

ment fee (to be prorated equally among vessels) for

coordinating arrivals and departures into and out of ports

for vessels owned, effectively owned or chartered by the

taxpayer, and other reasonable costs associated with the

operation or maintenance (or both) of the vessel and

(2) in addition to the eosts set out in (1) of this

subsection, in the ease of catastrophic loss or damage of a

vessel transporting oil or LNG from Alaska or enroute to

Alaska to take on oil or LNG, a part of the loss (for loss

or damage to the ship, for injury or loss of the captain or

erew and for damage and cleanup due to spillage of part

or all of her eargo, but not for the loss of the eargo itself)

which is borne by the shipper as the result of that

catastrophie loss or damage and which is not reimbursed

by insurance or by a third party; this part of the loss is

determined by alloeating the unreimbursed liability on

the basis of deadweight tonnage among the vessels owned,

effectively owned or chartered by the shipper to transport

oil or LNG (whichever was lost) from Alaska.

(f) A taxpayer “effectively owns,” has “effective own-

ership” or “effectively has an ownership mterest” in a

OOOO ——————o

88a

vessel, LNG transportation facility, or nonregulated pipe-

line facility for purposes of this section, if

(1) the vessel, LNG transportation facility, or nonreg-

ulated pipeline facility is owned by another person com-

prising part of a consolidated business in which the

taxpayer is also a part;

(2) the vessel, LNG transportation facility, or nonreg-

ulated pipeline facility is the subject of a capital lease in

which the taxpayer (or another person comprising part of

a consolidated business in which the taxpayer is also a

part) is the lessee; or

(3) the vessel, LNG transportation facility, or nonreg-

ulated pipeline facility was built to the account of the

taxpayer (or another person comprising part of the con-

solidated business in which the taxpayer is also a part),

was sold and was chartered back by the taxpayer (or

another person comprising part of a consolidated busi-

ness in which the taxpayer is also a part) in a simultane-

ous transaction and the vessel or LNG transportation

facility is on a term charter or lease to the taxpayer (or

another person comprising part of a consolidated busi-

ness in whieh the taxpayer is also a part) for 15 years or

longer.

(g) For purposes of this chapter, the “positioning

cost” for a vessel includes the costs not ineluded in the

charter for that vessel which are borne by the taxpayer for

placing that vessel into position before the first voyage

under that charter or the estimated costs to be borne by

the taxpayer for delivering it up at a specified location

after the last voyage under that charter, or both if the

taxpayer is obligated under the terms of the charter or

eontract of affreightment-to pay both costs.

89a

(h) A reasonable rate of return under (b)(3)(D) or

(b) (4) (B) of this section is presumed to be that amount

which yields an internal rate of return (after federal

income tax) on an investment which equals two percent

plus the average annual national inflation rate (measured

by the GNP deflator) during

(1) the period between the time the commitment is

made to construct or acquire the vessel or LNG transpor-

tation facility and the time the vessel or LNG transporta-

tion facility has been received (or delivered) and is ready

to be placed into service; or

(2) if the period in (1) of this subsection falls entirely

within a calendar year, that entire calendar year.

(i) At the request of a taxpayer or on its own motion,

the department will, in its discretion, replace the return

under (h) of this seetion with one based on the rate of

return imputed to that investment or similar ones by the

person owning or effectively owning the vessel or LNG

transportation facility.

(j) The third-party nature of an agreement between a

taxpayer and a third-party carrier regarding transporta-

tion costs is not affected during the term of that agree-

ment by a later consolidation of that taxpayer and carrier

into a consolidated business, if, at the time they entered

into that agreement, the taxpayer and the earrier did not

exercise, directly or indirectly, any control over the busi-

ness affairs of the other as the result of, or in anticipation

of, their consolidation into the consolidated business.

(k) For purposes of this section, a ‘pipeline facility”

includes all facilities incident to the pipeline transporta-

tion of oil or gas downstream from the point of production

as defined in 15 AAC 21.900. (Eff. 2/22/79, Reg. 69; am

5/21/81, Reg. 78)

90a

Authority: AS 43.05.080; AS 43.19.010 (Art. IV, see.

18); AS 43.21.020; AS 43.21.090; AS 43.21.120.

15 AAC 21.140. EXTRAORDINARY PRODUCTION

REVENUE (OR LOSS). (a) A taxpayer’s extraordinary

production revenue or loss for a lease or property is fully

recognized for purposes of this chapter in the year in

which it is realized. There is no ecarry-back or earry-

forward of extraordinary production revenue or loss

under this chapter to any other year, except to the extent

that an extraordinary production loss may contribute to a

taxpayer's net loss under 15 AAC 21.070. Multiple real-

izations of extraordinary production revenue or loss by a

taxpayer during a single year are cumulative, with reve-

nues added to revenues and losses to losses, and with

revenues and losses offset against each other.

(b) A retroactive decrease or increase in the tariff or

fee allowed to be charged by a regulated carrier for

transporting a taxpayer’s oil and gas produced from a

lease or property in the state results in extraordinary

production revenue or loss, respectively, for that tax-

payer, which is realized for purposes of this chapter at the

time when the retroactive change takes effect.

(ec) A retroactive inerease or decrease in the sales

price in a bona fide, arm’s length sale of a taxpayer's oil

and gas produced from a lease or property in the state

results in extraordinary production revenue or loss, re-

spectively, for that taxpayer, which is realized for pur-

poses of this chapter at the time when the retroactive

change takes effect.

(d) The amount of a taxpayer's extraordinary produe-

tion revenue or loss under (b) or (¢) of this section for a

lease or property is the amount of the increase or de-

crease, respectively, in the value at the point of produe-

tion for the taxpayer’s oil and gas from that lease or

9la

property to which the retroactive tariff change or change

in sales price applies, offset by any corresponding in-

crease or decrease in deductions under 15 AAC 21.200 —

15 AAC 21.290 which change as the result of changing the

value at the point of production for that oil and gas.

(e) In the ease of catastrophic loss of a taxpayer’s oil

or gas that has passed its point of production but for

which the risk of loss has not shifted from the taxpayer to

a common earrier or a third party, the taxpayer realizes

an extraordinary production loss for that oil or gas. The

amount of the taxpayer’s extraordinary loss in such a case

equals the reasonable cost of transportation borne by the

taxpayer for that oil or gas from its point of production to

the point of its loss, plus the value at the point of

production for that oil or gas but only to the extent that

the value at the point of production for that oil or gas is

included in the taxpayer’s gross production revenue for

the lease or property from (or to) which that oil or gas

was produced (or allocated), and minus reimbursements

to the taxpayer from insurance or from one or more third

parties for that loss. (Eff. 2/22/79, Reg. 69)

Authority: AS 43.05.080; AS 43.19.010 (Art. IV, see.

18); AS 43.21.020; AS 43.21.090.

15 AAC 21.150 — 15 AAC 21.190. (Reserved)

15 AAC 21.200. DEDUCTIONS FROM GROSS PRO-

DUCTION REVENUE —IN GENERAL. (a) Unless

otherwise specified, a taxpayer’s costs giving rise to a

deduction under 15 AAC 21.210 — 15 AAC 21.290 are

regarded as being incurred on a eash basis or on an

accrual basis, depending on which basis is used for

purposes of the taxpayer’s financial accounting.

(b) Costs previously claimed and actually deducted on

one or more of a taxpayer’s returns filed under AS 43.20

92a

and 15 AAC 20 must be excluded from the costs to be

used in caleulating a deduction under 15 AAC 21.210 —

15 AAC 21.290.

deduction under 15 AAC 21.210 — 15 AAC 21.290 and

part or all of those costs are reimbursable to the taxpayer

from one or more third parties, only the unreimbursed

portion of those costs of the taxpayer may be used in

calculating that deduction. (Eff. 2/22/79, Reg. 69)

Authority: AS 43.05.080; AS 43.19.010 (Art. IV, see.

18); AS 43.21.020; AS 43.21.090.

15 AAC 21.210. DEDUCTION FOR ROYALTY. (a)

The amount of royalty for a lease or property in a state

that is paid during a year by or for a taxpayer is a

deduction for purposes of determining the taxpayer's

taxable production income for tiat year.

(b) The value at the point of production (determined

on the basis of the value at the point of production for the

taxpayer's production interest at the time when the roy-

alty is delivered) of royalty for a lease or property in the

state that is delivered in kind by or for a taxpayer during

a year is a deduction for purposes of determining the

taxpayer's taxable production income for that year. (Eff.

2/22/79, Reg. 69)

Authority: AS 43.05.080; AS 43.19.010 (Art. IV, see.

18); AS 43.21.020; AS 43.21.090.

15 AAC 21.215. DEDUCTION FOR NATIVE CORPO-

RATION REVENUE SHARING. The amount of income

from the production of oil and gas from a lease or

property reported as revenue under AS 43.21.020 and 15

AAC 21.110 for the tax year that a taxpayer is required

under see. 7({i) of the Alaska Native Claims Settlement

Act to divide among the regional Native corporations is a

93a

deduction in determining the taxpayer’s taxable produc-

tion income for that year. (Eff. 3/26/82, Reg. 81)

Authority: AS 43.05.080; AS 43.19.010 (Art. IV, see.

18); AS 43.21.020; AS 43.21.090.

15 AAC 21.220. DEDUCTION FOR PRODUCTION

TAXES. Taxes imposed under AS 43.55 and AS 43.57 for

production from (or allocated to) a lease or property

which are paid by, or on behalf of, a taxpayer during a

year constitute a deduction in determining the taxpayer's

taxable production income for that year. The amount of

tax paid under AS 43.55 ineludes EDIC applied under AS

43.55.018 against that tax. (Eff. 2/22/79, Reg. 69)

Authority: AS 43.05.080; AS 43.19.010 (Art IV, see.

18); AS 43.21.020; AS 43.21.090.

15 AAC 21.230. DEDUCT

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