Legislature considers insurance pool for state's air carriers

Soaring insurance costs for aviation businesses in Alaska may prompt the Legislature to use state money to create insurance liability coverage for in-state air carriers.Alaska air carriers suffered as much as 80 percent increases to their premiums over last year, when many saw as much as 30 percent increases from 1999. Now, they are seeking help from state lawmakers.A series of hearings on the issue was held in mid-February by Rep. Andrew Halcro, R-Anchorage, chairman of the House Labor and Commerce Subcommittee. The hearings have spurred the lawmaker to draft a bill that would create a pool of money for qualifying air carriers to cover liability awards in the event of crashes.Lawmakers may be faced with making a decision to award as much as $25 million in seed money to assist statewide carriers in starting their own insurance pool."You are heading in the right direction, but you have to move the decimal points over a couple of figures," said Mike O’Neal of Security Aviation.O’Neal made the observation after Halcro offered a three-point plan that would have the state offering $10 million as seed money for an industry-created insurance company, with the carriers paying in an equal amount in premiums. He later realized that amount may not cover claims should more than one carrier have a loss.Halcro also suggested regulation of the pool by a board of nine individuals that would consist of airline, insurance, Federal Aviation Administration officials and state regulatory experts.Caps or limits on insurance premiums with incentives for companies with no accident claims and safety training programs along with high standards for companies seeking insurance coverage may also be in the offing.Creating an independent insurance pool for air carriers in Alaska is new, but not to the timber and the rural electrification sectors, which also have created their own insurance liability programs.Security Aviation has not had an incident or accident in the past, according to O’Neal, and receives the highest rating for safety by U.S. government agencies. He also has contracts for service to transport U.S. Air Force, Bureau of Land Management and FAA personnel. Yet he saw an 80 percent increase in his premiums this year. Why?One reason is high liability awards in state courts. In 1999 alone, insurance companies paid more than $25 million in claims to victims’ families in aircraft crash liability awards, and in one case four victims’ families were awarded $5 million each, according to insurance officials testifying at the hearings.The problem got worse in 1999 when insurance carrier American International Group Inc., or AIG, withdrew its coverage of Alaska companies -- and its money from a claims pool, forcing insurance writers to up premiums, according to statewide aviation officials."What we hope to do is offer relief to the aviation industry in Alaska, at a time when the insurance market has hardened to the point of breaking businesses," Halcro said during a Feb. 21 Labor and Commerce Subcommittee hearing.Those testifying at the hearing included representatives of the aviation industry, the insurance industry, the National Transportation Safety Board, the state Department of Transportation and Public Facilities and the University of Alaska."We will support an industry insurance pool for the carriers if they embrace something like the Medallion Program," said Leonard Kirk of the University of Alaska Aviation and Technology Program, and a Capstone trainer. "We have the capability and the facilities to offer recurrent and annual training, and we have simulators, and could offer more specific safety training."The Medallion Program, introduced by the Alaska Air Carriers Association during its 2000 conference, is a risk management program for carriers that would increase awareness of weather and flight challenges, with a goal of reducing accidents.Carriers qualifying for a Medallion status would be rewarded with increased marketing of the airline’s safety record, and, they hope, reduced insurance premiums."Alaska is as much attitude as it is a place," said Jim LaBelle, NTSB investigator and Northwest field office chief. "And that is the problem. We have a management oversight problem that has bullied pilots into flying when they should not have.""What this state has lacked is a company that would stick with air carriers for the long haul," said Neal Webster of Professional Insurance Adjusters. "What we have is one company leaving, forcing everyone to go to the new company for mandatory coverage. We need this pool to guarantee air carriers’ survival, and we need a more common sense approach to safety by the owners and pilots.""Where are we going to get our pilots after all the flight schools are shut down over increased insurance costs?" asked Pat O’Hare, owner of O’Hare Aviation, which recently shut down flight training for the winter.Halcro will draft a skeleton bill for approval by House Labor and Commerce Committee Chairman Lisa Murkowski."This may mean a large sum of money up front for legislators to agree on, but every one of the 60 legislators in the Capitol Building has at least one air carrier as a constituent," said Kevin Hand, chief of staff for Halcro.

Engineers urge senators to think big in transportation projects

Sitting behind a stack of 47 spiral- bound volumes representing previous studies of the possibilities of building a Knik Arm bridge, state senators heard from experts on Feb. 23 about their ideas for easing future transportation needs statewide."Projects like the Knik Arm bridge can be designed and built by local firms," said Dennis Nottingham, president of Peratrovich Nottingham and Drage Inc. Nottingham explained the concept of the bridge project, saying that it could be done today if there were a consensus of politics. He said that under current economic conditions the cost of the Knik Arm crossing would be about $300 million for a 600-foot span, using the same technology as the Yukon River Bridge designed by Nottingham when he was an engineer with the state Department of Transportation and Public Facilities.Senators heard from seven Alaska-based engineering firms and the Alaska Truckers Association, about future transportation infrastructure needs that point to connecting existing highways, increasing the size of ports and harbors statewide and more railway access to rural Alaska.At the invitation of the Senate Transportation Committee, engineering experts explained that Alaska needs more and bigger projects, but to do them the state DOT’s Statewide Transportation Improvement Program rating system needs to be revamped first."Studies of projects before they are undertaken is costing us millions of dollars and not providing us with viable projects," interjected Sen. John Cowdery, R-Anchorage.Leading the charge against the STIP was Sen. Dave Donley, R-Anchorage, who stated to a room of 50 onlookers that DOT’s rating system is no longer adequate to produce more than a small number of projects yearly, and does not address the needs of the state equally.Despite STIP concerns, engineering firms agreed that due to the state’s vast amount of coastline and lack of roads in and to rural Alaska, that bigger port and road projects need to be figured into the state’s long-range plans."We have periodic spikes of million dollar projects; what this state needs is more billion dollar projects," said Stewart Osgood, vice president of operations for Dowl Engineers.New roads, bigger ports and rail access to Nome, Kotzebue and the North Slope were among the themes of the presentations, but conspicuously missing were assessments of statewide airports, a key link to statewide transportation.Currently there are 150 airports statewide that are less than 3,300 feet in length, 35 runways less than 2000 feet, and 71 airports are unlit, according to the Alaska Aviation Coordination Council’s Felix Maguire, who was in attendance at the hearing.Jim Rooney, president of R&M Consultants, mentioned airport improvements by stating that they are the lifeline of Alaska, and need four times as much funding from the Federal Aviation Administration as they currently receive, but none of the firms identified future airport needs.Rooney spotlighted the need for larger harbors and port projects in Anchorage, Naknek, King Salmon, Whittier, Seward and Homer.Ted Trueblood, president of Tryck Nyman & Hayes, suggested increased rail access to Denali Park and rail corridors to McGrath, Nome and Kotzebue, and a rail extension to Canada.John Aho, vice president of CH2M Hill, testified that his firm is currently contacting communities on the North Slope and in northwest Alaska to identify transportation projects needed and to reduce expenditures by determining the best corridors for future transportation needs.CH2M Hill’s study is currently in the draft stage; the company will give recommendations to the state in a year.VECO, represented by vice president of community and government affairs Rick Smith and joint venture partner Nottingham, explained to questioning senators Cowdery and Jerry Ward, R-Anchorage, that statewide firms have not only the brain trust to engineer projects but in the case of VECO, which has an extensive workforce both in-state and globally, can complete any future transportation projects regardless of their complexity.Two firms, Lounsbury and Associates and Arctic Slope Consulting Group, or ASCG, were invited to the hearing but did not attend.Cowdery will take the information from the hearings to Washington D.C. where he will meet with Rep. Don Young,R-Alaska, who chairs the House Transportation Committee.

March-Issue-1 2001

This Week in Alaska Business History February 25, 2001

Editor’s note: "This Week in Alaska Business History" revisits events that shaped our past."Those who cannotremember the past arecondemned to repeat it."-- George Santayana, 1863-195220 years ago this weekAnchorage TimesFeb. 26, 1981Finances force Alaska Hospital to lay off 30By Maureen BlewettTimes WriterThe Alaska Hospital and Medical Center, facing an empty bank account and three-quarters of a million dollars in unpaid bills, took what one administrator called an "odious" step Wednesday and laid off 30 employees.The cutbacks came because the hospital’s bank account "dried up," said administrator Ron Pavellas.Paradoxically, the financial crisis comes while business at the hospital booms. "We just didn’t have a cushion to pay the costs of more business," Pavellas said.The layoffs, which take effect in two weeks, will not change patient care. No nurses or technicians were laid off, he said.Anchorage TimesMarch 2, 1981Canada wants U.S. gas line commitmentBy Betty MillsTimes Washington BureauWASHINGTON -- The Canadian government is seeking assurances from President Reagan that the U.S. is committed to the completion of the Alaska Highway natural gas pipeline, Canadian ambassador Peter Towe said today.At a breakfast briefing with reporters here, Towe said the Canadians would like a letter from the White House that emphasizes its support for the project, similar to the one provided by former President Carter."President Carter wrote a letter to Prime Minister Trudeau indicating he is in favor of the (pipeline) agreement and the construction of the pipeline and its conclusion before 1985," Towe said."We would like, and the financial markets and private industry would like, that the same kind of commitment from President Reagan. We want to make sure this executive branch is as interested as the previous administration."10 years ago this weekAlaska Journal of CommerceFeb. 25, 1991’Intermediate’ fields will need larger discovery nearby, BP director saysBy Ray TysonFor the Journal of CommerceDevelopment of Niakuk, Seal Island, Pt. Thomson and other "intermediate" size fields in the Alaska Beaufort Sea hinges on a large oil discovery in the region, said John P. Browne, managing director of BP’s worldwide exploration arm."We (industry) have yet to find in the further offshore, something which is big enough to catalyze the development of that area," Browne said during a recent visit in Anchorage.While location and water depth would determine just how big a field is needed for it to be economical, Browne said, "I think you need something in excess of 500 million barrels. If someone found 500 million barrels, I’m sure they would try very, very hard to get it going."Last year BP suspended development of its 58 million barrel Niakuk field because of low oil prices and unanticipated expenses associated with gas-handling that nearly doubled the project’s costs to $250 million.Alaska Journal of CommerceFeb. 25, 1991Bechtel wins second contract from Yukon PacificBy Margaret BaumanAlaska Journal of CommerceYukon Pacific Corp. has awarded a second preliminary design contract to Bechtel Corp., this time for an 800-mile pipeline and compressor stations for the Trans-Alaska Gas System.The latest contract, effective Jan. 19, went to Bechtel in San Francisco, with the caution that neither contract signals an official go-ahead on the project."Like our earlier agreement with Bechtel for the LNG facility, the preliminary design work for the pipeline and compressor stations must also be done to satisfy permitting requirements for the construction of TAGS," said William V. McHugh, president and chief executive officer.-- Compiled by Ed Bennett.

Aleut's Adak gamble could pay off big for shareholders, region

The Aleut Corp. is doing fine, according to company officials. The Aleutians-area Native regional corporation is profitable -- not wildly so, but steady -- and has been for years. Its commercial office buildings in Anchorage are full of tenants and making money, according to president Vince Tutiakoff Sr. A $6 million-plus investment portfolio turned in a record performance last year, though this year represents a challenge. In its business ventures, an innovative initiative in the federal facility management service business has been such a winner that the company, SMI International (formerly Space Mark Inc.) has graduated from its preferred minority status. SMI now competes for business on a straight commercial basis, and the competition is tough. Aleut Corp. president Vince Tutiakoff Sr.’s biggest gamble is converting Adak into a profitable support base.   So why is the Aleut Corp. taking on a huge gamble, a venture to convert a billion-dollar closed naval base far out in the Aleutian Islands into a profitable commercial support base and, even more daring, a new community? The risks are big. The Aleut Corp., with $2.4 million in earnings last year, has already invested $2.5 million in various expenses related to Adak, although government contracts with Aleut Corp. subsidiaries have recouped some of that. Still, it could easily become a costly white elephant. Partly, the Aleuts have to take advantage of an opportunity to do something with Adak, as risky as it is, Tutiakoff said. To do nothing would risk continued decline of the region’s economy, jeopardizing the communities there. For example, with the Adak naval base closed and cutbacks at other military installations like Shemya, vital air and marine services to the region and its communities have been affected, Tutiakoff said. This has become an extremely serious problem for the entire Southwest Alaska region, he said. Cargo airlines are interested in serving the area, but what is really needed are passenger operators who can fly planes big enough to move large numbers of people with the cargo. If airlines could operate combination cargo/passenger services it would be ideal, but waivers are needed from the federal government to allow this, Tutiakoff said. Added to that are the uncertainties of commercial fishing in the Bering Sea and western Gulf of Alaska due to restrictions on fishing to protect Steller sea lions. If Adak can be developed commercially, it will not only reinforce the regional transportation network, vital in such a remote area, but will open new commercial fisheries that are undeveloped mainly because support services were previously unavailable, Tutiakoff said. If the Aleuts can pull it off at Adak, it makes the corporation an economic kingpin in its home region and gives it a big stake in supporting commercial fisheries, Tutiakoff pointed out. He said it’s also a big benefit for the corporation’s shareholders because a new community, soon to become a second-class city, populated partly by shareholders holding good jobs, will have been brought into existence. For now, things are going well at Adak. Despite the slowness of the transfer process, Tutiakoff compliments the Navy for streamlining and expediting things. Most communities involved in military base closures and transfers are far behind where the Aleuts are now at Adak, he said. The State of Alaska has approved formation of a second-class city, and it is in the process of being created. The Aleut Corp. itself will soon take title to 47,000 acres of land in and around the community. Congress must approve the transfer, but that is fairly certain when the remaining details are worked out, Tutiakoff said. There are about 280 people now living and working on the island, and about 25 children in school. Aleut Enterprise Corp., a subsidiary of Aleut Corp., sells fuel, provides port services, housing and commercial lease space to fishing boats, according to Sandra Moller, who is in charge of AEC. The Navy maintained 20 million gallons of fuel storage capacity, making it now the largest regional commercial fuel facility in the Aleutians and Bering Sea area. Unalaska/Dutch Harbor has about 17 million gallons between three plant owners. The largest fuel storage facility in Western Alaska is much farther north, Moller said. It is at the Red Dog Mine north of Kotzebue. It has 25 million gallons of storage capacity. Interestingly, AEC purchased diesel fuel from Russia last year, and it was delivered in October by a Russian tanker. A similar delivery is expected this spring. The Russian fuel is high quality and is tested as it is loaded in the Russian Far East by a U.S. firm and retested as it is unloaded at Adak, Tutiakoff said. He said there are substantial economies of scale in fuel shipment if fuel can be moved by large tankers rather than barges, such as those employed by Crowley Marine, the major U.S. fuel shipper serving the region. AEC may next be working out an arrangement to supply communities in the region from Adak, Tutiakoff said Norquest Adak, a Seattle-based fisheries company, had a good first year at Adak after its acquisition of a fish processing plant on the island, Tutiakoff said. The plant, now 2 years old, was opened in 1998 and operated by Adak Seafoods, a start-up company. Fishing vessels, mostly larger boats up to 220 feet in length, have been fishing for cod, halibut, and crab in the region. One encouraging sign is that halibut landings increased from 300,000 pounds two years ago, the first year of local fishing, to a million pounds last year, Tutiakoff said. "Adak also had the largest catch per unit of effort in the Pacific," Moller said. Previously there was no fishing around Adak because the Navy maintained a 20-mile vessel exclusion zone around the island, and there were no services available. The Aleut Corp. hopes to eventually see a year-round small boat fishery established at Adak, Tutiakoff said. The North Pacific Fishery Management Council has established an allocation of cod for small boats fishing from the island, and the state Department of Fish and Game has set aside an exclusive fishing area for small boats, up to 60 feet in length. There will be continuing work on environmental cleanup and demolition of some structures for which there can be no use, Tutiakoff said. Adak also will play a support role for a new cleanup program planned for Amchitka Island, where underground nuclear tests were carried out, he said. In the future, Tutiakoff said Adak could become a support base for regional fisheries research, which could be important given the high priority placed on gathering biological and other data in the region. He said the corporation could assist in establishing no-trawl and even no-fishing areas in waters around the island for scientists to study, Tutiakoff said. There are, of course, challenges at Adak. One is the complicated process of taking over the closed Navy facility. The Navy, by law, must deal with a public entity, so the Aleut Corp. had to secure state legislation establishing an Adak Reuse Corp. to work with the Navy. The corporation, through Aleut Enterprise Corp., is working on marketing commercial uses, but the Navy deals officially with the Reuse Corp. Eventually, the new city government will take over public functions. A practical issue is how to modify, or to mothball, electrical generating facilities that are now running at 30 percent capacity, a rate which can cause damage to equipment, Tutiakoff said. Another issue is what to do with a thousand military housing units, some almost new, but which will deteriorate in the damp, windy Aleutian climate unless maintained and used. Tutiakoff said many of the duplex-type units may be sold and moved off the island by barge. Units which cost $150,000 to build might be sold at a discount to regional housing authorities and moved to nearby communities by barge.  

Tesoro's 2000 earnings set a company record

SAN ANTONIO -- Tesoro Petroleum Corp. had record earnings in 2000, the company said Feb. 13.The Texas-based corporation owns a refinery in Nikiski and a network of service stations across Alaska. In recent years it added refineries in Washington state and Hawaii.Profits totaled $73 million last year, or $1.75 a share. That was more than double 1999’s $32 million.Bruce Smith, Tesoro’s chairman, president and chief executive, said improved cash flow allowed the company to pay down debt and improve its balance sheet to pay for future expansion.Last spring, the company considered selling the refinery in Nikiski, but in May executives decided to keep it.For the fourth quarter, Tesoro earned $24 million. In the disappointing fourth quarter of 1999, the company lost the same amount.

Native corporations leap into wireless

A trio of Alaska Native corporations is working together to enter the wireless industry and plans to serve major markets that include Los Angeles and New York.However, some critics are questioning the outcome of the process that helped the consortium acquire rights to those markets.Arctic Slope Regional Corp. of Barrow, Doyon Ltd. of Fairbanks and Juneau-based Sealaska Corp. formed Alaska Native Wireless to bid on wireless licenses auctioned by the Federal Communications Commission. The spectrum auction, which began Dec. 12, was completed Jan. 26.Officials from Alaska Native Wireless believe the bids represent the largest acquisition ever of federal communications licenses by a minority-controlled entity.Alaska Native Wireless, with its partner AT&T Wireless, was the high bidder on almost $2.9 billion in wireless licenses covering 43 markets with a total population of 71 million. Markets include Los Angeles, New York City, Denver, Tampa, Fla., Cleveland, Jacksonville, Fla., Minneapolis, New Haven, Conn., and Portland, Ore.While the FCC is finalizing the bid award process, the Alaska consortium is now studying how to serve those markets, said Conrad Bagne, head of ASRC Wireless, the managing partner for Alaska Native Wireless.Although the company has not yet prioritized which markets it would serve first, the two markets for which Alaska Native Wireless paid the most are important, said Bagne, who also is ASRC’s chief administrative officer."New York and L.A. are obviously a priority," he said, noting that the total price for those two licenses represented two-thirds of the company’s total bids.Alaska Native Wireless also is developing a business plan for licenses it acquired in Fairbanks and Juneau, he said. One consideration is how the FCC’s incentives for companies serving Native communities around the nation will apply to the two Alaska cities, he said.The Alaska consortium submitted further FCC filings and deposits in mid-February, but Bagne said the process could continue for 30 to 180 days. Part of the federal procedure includes the FCC’s review of the applications followed by a period for challenges to be filed against the auction bids."We fully expect there to be a bump in the road in the process," Bagne said.An article published in The New York Times on Feb. 12 quoted critics who said some of the largest U.S. wireless companies took unfair advantage of FCC rules to win a majority of licenses aimed at small businesses. Criticism was not logged specifically against Alaska Native Wireless but the company does have a partnership with major player AT&T Wireless.In March the FCC will issue another public notice for the auction’s high bidders who have sufficiently completed a long form application, said FCC spokesman Mark Rubin. Once the public notice is published, a 10-day period begins to file petitions to deny the bid awards, he said. Challenges could include if a company can be proven to be owned by a foreign company or if it violated auction rules, rather than objections to policy, he said."The petition to deny phase is not the phase to question the rules," he said. "The FCC can make a change for the next auction, but not for this one."Rubin did not believe any lawsuits had been filed on this auction.Bagne of Alaska Native Wireless said the consortium followed the FCC regulations, and he believes the bids will be found valid."Our response has been that the FCC put out rules and requirements for small entrepreneurs. We believe we fit those requirements."AT&T Wireless has said it will pay $2.6 billion of that total, while the three Native corporations and other consortium investors will contribute $260 million.The broadband personal communications service spectrum licenses are important for AT&T Wireless’ future plans. Last November the wireless giant formed a subsidiary to develop multimedia applications for its current network and a new wireless network built for graphic presentation of data, video e-mail, high-quaility music downloads and streaming audio and video, according to Alaska Native Wireless.The Alaska consortium will employ few people in the state, but will hire others in markets where it operates, Bagne said.To serve the markets, Alaska Native Wireless will either use AT&T Wireless’ infrastructure, build its own network of repeaters or work with another company in areas not served by AT&T Wireless, he said."In the long term we hope to be an operator of our licenses and maximize the return on our investment," he said.Alaska Native Wireless plans to continue its relationship with AT&T Wireless for at least five years, he said. "Where it goes beyond that remains to be seen," Bagne said.He also is optimistic about other opportunities in the industry.Another Native corporation, Cook Inlet Region Inc., has invested in the wireless industry through VoiceStream Wireless Corp., which has proven successful for CIRI. A special FCC ruling last year allowed CIRI to transfer its interest in four limited partnerships and limited liability companies to VoiceStream in exchange for VoiceStream stock and cash. The CIRI board chose to use corporation assets to pay for the program and reimburse itself later by selling those shares.In December CIRI paid the largest distribution ever by a regional corporation, totaling about $314 million to nearly 7,000 shareholders.Alaska Native Wireless would consider a similar payout to shareholders "if we can be as successful as CIRI," Bagne said. "Our deal is definitely different. It took them five years. It doesn’t happen overnight."

Birchwood's Arctic Sparrow new Antares ultralight distributor

Arctic Sparrow Aircraft Inc. of Birchwood Airport in Chugiak recently announced that it will reassume the North American distributorship for the Antares ultralight aircraft, and will offer the aircraft both as a legal Part 103 air vehicle and as a 51 percent homebuilt kit.Part 103 refers to Federal Aviation Administration rules governing ultralight aircraft."We want to make these aircraft for the U.S. and Canada," said Mike Jacober, president of Arctic Sparrow.Arctic Sparrow is an ultralight service center and flight school. The company also manufactures skis for ultralight and experimental aircraft, and mixture controls for two cycle engines. Arctic Sparrow recently re-assumed the dealership from Sergei Zozulia, proprietor of Antares Ltd. of Zoporizhe, Ukraine.Arctic Sparrow turned the dealership over to Leading Edge Airfoils Inc. of Colorado Springs, Colo. in 1996.Zozulia and Jacober will offer the Antares MA-33 both as complete two-place Part 103 aircraft and as a 51 percent home built plane that can be registered with the FAA as an experimental amateur-built glider, or experimental amateur-built airplane."This should work perfectly," said Zozulia. "We are very experienced at building and flying these ultralights."The Antares is offered with several wing options from Aeros Ltd. of Kiev, Ukraine; all will be 51 percent kits or can be ready to fly. The Antares, both in kit form and as complete units, can be fitted with either the Rotax 503 52-horsepower or 582 64-horsepower two-cycle engines. Complete kits with engines start at $12,000, with additional accessories also available. The Arctic Sparrow ultralight kits can cost as much as $18,000, and can be built in approximately 100-200 hours. These kits can be built as FAA experimental amateur-built airplanes or experimental amateur-built gliders.Zozulia and Jacober met in 1992 in the northern Alaska community of Wales after a group of seven Russians, Ukrainians and Czechs touched down there after crossing the Bering Strait with ultralights.

Offices, hotel among investments

Besides its Adak activity and Aleut Enterprise Corp., the Aleut Corp. owns four office buildings in Anchorage, and one in Colorado Springs, Colo., and land in Colorado Springs where future office development is planned.The corporation owns a trailer court near Valdez and 10 percent of a new hotel in Portland, Ore.SMI International is a subsidiary engaged in government and commercial facility operations in several states and overseas. SMI is expanding into information technology areas with the acquisition of other firms.TEC Star Inc. is another wholly-owned subsidiary formed to do federal operations and maintenance contracts. The Aleuts also own 40 percent of Akima Corp., a partnership with NANA Regional Corp., which also does federal facility management.In addition, the Aleuts own 73 percent of Alaska Trust Co., an Anchorage-based firm specializing in trust management services for well-to-do clients, many from other states. In its third year of operation, the company is now profitable, officials said.The corporation maintains a "Permanent Fund" of investments with an asset value of about $3 million. When the fund reaches $10 million, 50 percent of its earnings will be paid out in dividends to shareholders, according to company officials.

Money-losing subsidiaries have to go

Although timber harvesting, Sealaska Corp.’s core business for 21 years, is doing well even in a down market, things have gone sour on some promising new ventures and the stock market hasn’t cooperated.For the first time in 17 years, the Southeast Native regional corporation will report a loss. On top of that, Sealaska has lost its key chief executive, Bob Loescher, a long-time top manager and president and chief executive since 1997. Loescher stepped down in January for a variety of reasons. A search for new CEO is under way.Before he left the top job, Loescher had put Sealaska on a correction course."These are rough waters for Sealaska right now, but we’re taking the appropriate actions to deal with them," Loescher said in a December report to shareholders."We are implementing an immediate action plan to correct the financial situation, by selling off or writing down unproductive assets," he said.A new strategic plan will have Sealaska move away from operating companies and toward venture-capital type opportunities and partnerships with other businesses.For example, a new wireless telecommunications venture with AT&T, Arctic Slope Regional Corp. and Doyon Ltd., two other regional corporations, is showing great promise. So is an investment in a resort development near San Diego with the San Pasqual Band, a local Native American group.Among the businesses Sealaska will sell are its holdings in TriQuest, a precision plastics and injection molding firm owned by Sealaska, a small limestone mine at Calder, on Prince of Wales Island, and some real estate outside of Alaska owned by the corporation.TriQuest has been hurt by the tumult in the computer and high-tech industries, which are its key customers. The mine at Calder, which produces a very high quality limestone used in the making of fine paper, has cost more to start than was thought, Loescher said to shareholders.Rick Harris, Sealaska’s senior vice president for resources, said the Calder mine has the potential of growing into a solid business for the right company, but that its expected return on investment is no longer appropriate for Sealaska.

BP nearly doubles quarterly profits

LONDON -- Higher prices for crude oil and the integration of newly acquired businesses more than offset pinched profits in the chemicals business and helped BP Amoco PLC nearly double its fourth-quarter operating profit to $4.09 billion.The company said Feb. 13 that increased oil and gas production and its success in cutting costs contributed to the quarterly 93 percent rise from last year’s operating profit of $2.12 billion.On an annual basis, BP Amoco’s operating profit, not including one-time gains and losses, more than doubled to $14.2 billion from $6.21 billion.Chief executive Sir John Browne called the result "outstanding." BP Amoco benefited from a surge in world oil prices that was beyond its control. The price for a barrel of North Sea Brent crude rose to $29.56 in the fourth quarter compared to $24.13 during the same three months of 1999.Operating profit for BP Amoco’s exploration and production business rose to $4.7 billion from $2.63 billion, after an adjustment for one-time gains and losses.The company helped its bottom line by increasing quarterly output volumes by 9 percent over the previous year, due entirely to an increase in its production of gas. BP Amoco expects soon to reap profits from a gas project in Vietnam and discoveries of oil off the coast of Angola and in the Gulf of Mexico.Improved profit margins and the contribution from BP Amoco’s buyout of Atlantic Richfield Co. drove a 211 percent increase in quarterly operating profit in its refining and marketing business. The unit’s quarterly profit soared to $1.44 billion from $464 million.Adjusted earnings at the company’s chemicals business almost halved in the fourth quarter, due to steeper prices for oil -- its main raw material. A spike in gas prices and a weak euro exacerbated the downturn to $140 million from $266 million.BP Amoco’s Gas and Power boosted its quarterly operating profit to $60 million from $48 million, the company said.Browne forecast that the company’s business environment would stay "generally positive" in 2001, notwithstanding signs of a slowdown in global economic growth. Oil and gas prices would likely remain volatile, albeit at levels below those of last year, he said.Short-term tightness in inventories of refined products should benefit profit margins in refining, while chemicals were expected to come under greater pressure from a slowing economy and excess production capacity in the industry, Browne said.

Hospital delay angers senator

FAIRBANKS -- Alaska Sen. Frank Murkowski is angry with the U.S. Army Corps of Engineers for a delay in plans for a new Army hospital at Fort Wainwright.The $130 million project to replace 47-year-old Bassett Army Community Hospital is on hold because contractors’ bids to build the 250,000-square-foot structure exceeded the federal government’s budget. Murkowski blamed the corps for not anticipating the high bids.The Republican senator also said contractors are leery of working for the Department of Defense because of problems that surfaced when a new hospital was built at Elmendorf Air Force Base in Anchorage. Contractors, who were locked into a price, allegedly lost money on that project and litigation followed."We’ve got a situation where the contractors are scared to death,’’ Murkowski said at a briefing Feb. 17 on the new hospital.The senator, who holds a seat on the Senate Veterans Affairs Committee, was in Alaska accompanying Anthony Principi, the Bush administration’s secretary of Veterans Affairs, on tours of veterans facilities in the state.Murkowski criticized the Corps for not checking back with consultants who, before the project went out to bid, had said that the project’s parameters corresponded with the project’s budget.The Army is faced with either scaling down plans for the new hospital, seeking more money or persuading contractors the project is well-planned and hope they lower their estimates.Ground near Bassett has already been dug up in preparation for the new hospital.

Sealaska works to keep timber its bright spot

While it hasn’t been the best of years for Sealaska Corp., the Native regional corporation for Southeast Alaska based in Juneau, one thing is going exceedingly well: timber. Sealaska’s 220 million acres of commercial timber lands in Southeast have become a natural resource "Permanent Fund" for Sealaska, earning steady revenues. "If we manage this right, it’s a sustainable resource," said Rick Harris, the corporation’s senior vice president for natural resources. "We can continue harvesting at our present rate indefinitely." Last year Sealaska Timber Corp., a subsidiary, contributed $80 million in gross revenues to the parent corporation and other Native corporations, since 70 percent of the net resource revenues must be shared under terms of the 1971 Alaska Native Claims Settlement Act. "We have a substantial sharing obligation to other regional corporations. Every Alaska Native benefits from our timber harvesting in Southeast Alaska," Harris said. Seedlings are planted near Klawock as part of Sealaska’s extensive tree replanting program. This year Sealaska will harvest 123 million to 125 million board feet of timber from its lands. Managing it right, however, means backing up the forest’s natural regeneration with a program of replanting native Sitka spruce seedlings in selected places. Southeast Alaska’s moist climate allows nature to take care of itself in most logged areas, but Sealaska’s reforestation program provides a boost in some places. About 150,000 seedlings are being planted this year on 1,000 acres of logged land, Harris said. Sealaska maintains its own seed bank from native trees, collecting seed cones from several regions because of potential genetic adaptation to local conditions. Southeast’s forests can regenerate themselves. When areas are harvested, young seedlings are usually left in the overburden. That’s not true in all forest states, Harris said. In Maine, for example, the forest industry must be much more aggressive in reforestation. Sealaska began replanting in 1982 and has been working on reforestation with scientists from Oregon State University for 15 years. In some places, replanted trees are now 50 feet tall and six to eight inches thick, Harris said. As replanted forests grow, the corporation also thins them so that excessive shade doesn’t crowd out vegetation on the forest floor, which is important in maintaining habitat for wildlife. "If you get too much shade you limit the variety of other plants that can grow. We work carefully to enhance the undergrowth," Harris said. "We do these things for economic as well as social reasons. We’re enhancing the value of our assets as well as benefiting wildlife." That’s important, too, in retaining support in communities near Sealaska’s harvest areas. The corporation works closely with U.S. Forest Service scientists in Juneau to develop computer models predicting the outcomes from timber harvest and the planting and thinning that is part of forest management, Harris said. In this way, strategies are developed to restore and maintain deer habitat. "Everyone uses our logging roads for hunting. The deer are abundant, and hunting success is quite high," he said. The corporation likewise works on maintaining good forest habitat for salmon spawning in a program with the U.S. Environmental Protection Agency, the Alaska Forest Association and other Native-owned forest companies like Koncor Forest Products and Chugach Alaska Inc., a Southcentral regional corporation with timber resources. Sealaska’s economic importance to the Southeast region is also quite high, and the corporation is keen on employment and training for shareholders and other local residents. "We want local people involved in our operations, because that creates a sustainable economy for our communities," Harris said. Maintaining a sustainable resource has also turned out to be a key marketing advantage, and it has helped Sealaska maintain sales to its key customers in Asia, even through the recent economic downturn in the region. "We’re in a tough, competitive timber market, but we’re doing quite well given the circumstances," Harris said. While timber demand in places like Japan has declined, so has supply on the market for the types of timber Sealaska sells. Harris thinks the market has now reached stability. What gives Sealaska an edge over competitors are the dependability of its timber supply, its ability to offer a mix of several species of timber, long-established relations with customers and a reputation for quality, Harris said.  

Bering Sea crab fleet buyback details still must be worked out

UNALASKA -- It’s called the Capacity Reduction Program for Bering Sea/ Aleutian Islands Crab Fisheries -- buyback for short. In late December Congress created the $100 million program to reduce the crab fleet. Fishermen say it’s necessary for their survival in a time of slashed crab quotas. It’s good policy, says its sponsor, Sen. Ted Stevens, R-Alaska.But classic free market purity it’s not, and in a visit to the Aleutian Islands last year, Stevens described a fellow senator’s objection."He seriously questioned whether we should use taxpayer money to buy boats back that had been brought into the fleet as the product return had gone up," Stevens said. "He felt that when it went down, that should be part of the risk taking of being an entrepreneur." But buybacks can work, Stevens said."I think it will help. I was hoping they’d just be buying permits, and not permits and boats," said Gary Stewart, president of the Alaska Marketing Association, which negotiates prices for Bering Sea crab fishermen. "If we could have just bought permits, we could have got a lot more boats out of the fleet. That way, we’d get a lot more bang for our buck.""It will let a lot of boats get out of the business without going into bankruptcy, maybe keep their homes. It will reduce the fleet so the boats that stay in the fishery will have a chance of surviving these hard times," said Aleutian Lady owner Rick Shelford.Shelford expects lots of interest, at least 75 boats, "more than what the money’s there," exceeding the $100 million. "There are a lot of guys that are in pretty tough shape right now." The $100 million has yet to be appropriated, and $50 million must be repaid to the boats remaining in the fishery. Final approval for the buyback requires a majority vote of the crab fleet. The buyback involves a "reverse auction," with vessels ranked according to catch history. The more crab a boat caught, the more likely it gets bought out."Those that appear to remove the most harvesting potential from the fishery for the least amount of money will be accepted," said Phil Smith of the National Marine Fisheries Service in Juneau.Currently 330 boats are among the "closed class" allowed to fish Bering Sea crab, Smith said. But as to who is eligible for the buyback is unclear. One set of qualifying dates is based on a 1998 action of the North Pacific Fishery Management Council that never became federal law, he said."The statute itself is internally inconsistent and contradictory," regarding buyback eligibility, said Smith, adding that the agency’s legal staff is reviewing that issue."Congress passed it in December, and put it in NMFS’ lap" to work out the details, said Gretchen Harrington of the National Marine Fisheries Service, in Juneau. "We’ve only had one month to try to create this whole program. We want to create a good program, and that takes time."Still undetermined is if retired crab boats could continue in their summer work as salmon tenders, transporting fish from small catcher boats to processing plants."That question was asked by a fisherman, and we haven’t figured out the answer. We don’t think so," Harrington said."The fishing history of that vessel evaporates, and the fishery endorsement is voided. They can’t be used in a commercial fishery. I guess you could use them to run tourists out to watch whales," Smith said. Other possibilities mentioned by fishermen include yachts and research vessels, although the fuel consumption might be a bit much for a pleasure craft.The buyback program is being developed by NMFS staff at the agency’s Silver Spring, Md. headquarters, including some of the same people who devised East Coast boat buyback programs, Smith said. The buyback law sets a May 1 deadline for final regulations."It’s a complex issue. There’s many things that have to be addressed, but at least it’s a start," said crab fisherman Larry Hendricks, who sees individual quotas as the logical next step. The buyback legislation requires a study of various rationalization schemes, including cooperatives and quotas for fishermen, processors and communities.Jim Paulin can be reached at ([email protected]).

Divers trace Cook Inlet oil leak to hole in undersea pipeline

ANCHORAGE -- The source of a Cook Inlet oil leak, and the resulting weeklong shutdown of Unocal’s Dolly Varden production platform, was traced Feb. 15 to a hole smaller than a quarter-inch in an undersea pipeline.Divers were able to pinpoint the hole, but ice floating in the Inlet made it unsafe for them to conduct further testing that would help Unocal figure out how to fix it, company spokeswoman Roxanne Sinz said.Until the line is fixed, Unocal will send crude oil through a natural gas line that leads to the platform, Sinz said. It is a former oil line, so Unocal made the switch with minor modifications at either end, she said.Before the platform shut down for testing, it was pumping 3,800 barrels of oil a day, she said.Sinz said she couldn’t provide a cost estimate for the spill, but said it would run higher than the weeklong loss of oil revenues.Sinz has said the amount of oil believed lost is small, possibly 2 to 20 gallons.

Bristol Bay faring well

Bristol Bay Native Corp. has not been afraid to tackle big, high-profile commercial ventures. Two of them, purchasing and later selling Peter Pan Seafoods and the Hilton Anchorage Hotel, turned out well.Luck ran out on the third deal, though. If it’s any consolation, the recently failed Alaska Marketplace grocery venture, in which BBNC was a 34 percent minority partner with $2.3 million invested, was more modest compared with the earlier seafood company and hotel acquisitions."It didn’t help that Alaska Marketplace announced its store closures just as we convened a shareholder meeting in Anchorage," said Tom Hawkins, BBNC’s senior vice president and senior operating officer.In a $135 million corporation, a $2 wobble in stock values in the company’s investment portfolio would be accepted gracefully. But when the high-profile Alaska Marketplace deal went down, "it was noticed" around Alaska, Hawkins said.  Bristol Bay Native Corp. Chairman Hjalmar Olson and board member Dorothy Larson expect good earnings from their environmental cleanup subsidiary.PHOTO/Danny Daniels/AJOC"When it comes to something we do every day like shopping for groceries, we all become experts," Hawkins said. And so, BBNC’s shareholders had lots of advice for management at the meeting, he recalled.The investment portfolio isn’t doing that well this year either, but it turned in a good performance last year with a 17 percent return. That helped BBNC’s net profit reach $11.5 million. Mainly because of the stock market, BBNC’s profits will be down this year, Hawkins said.The first three quarters of the corporation’s fiscal year, ending in December, saw net income of $4.5 million, and BBNC is on track for an estimated $5.5 million profit this year, Hawkins said."Our ideal is for our investment portfolio to provide half of our annual profit and our businesses to provide the other half," Hawkins said. "We’re not there yet, because we’re still too dependent on our portfolio. But our businesses are making progress."Except for Alaska Marketplace, BBNC’s other business ventures are doing well. Bristol Environmental and Engineering Services, which provides environmental, engineering services and construction management, started out with three employees in 1994 and now has 40 year-round staff members and 60 to 70 in the summer, Hawkins said.The company has a contract with the U.S. Navy to do cleanup at the closed Adak naval air base in the Aleutian Islands, and recently landed another cleanup contract at Amchitka, near Adak, the site of underground nuclear tests. The company is expecting to earn a $2 million profit this year, up from $1.44 million last year, Hawkins said.He said CCI, an oil and industrial services contractor, also is doing well with an upsurge of petroleum support work on the North Slope, where the company does 45 percent of its business.PetroCard, a company operating fleet refueling services in the Seattle region, is growing fast and doing well, Hawkins said. PetroCard’s earnings from operations grew 50 percent in 2000, to $1.9 million, compared with $1.3 million in 1998 and $209,000 in 1998."Our gallons sold are up and prices are high, so margins are good for PetroCard," Hawkins said. "But one problem is the State of Washington business tax, which comes off gross revenues. As prices go up, that takes a bigger slice."PetroCard is expanding further this year. Higher volumes, high prices and good margins will translate into another good year for the company, Hawkins said.In years past, the Peter Pan Seafoods and Hilton Hotel deals were interesting challenges for BBNC. The corporation purchased the former Anchorage Westward Hotel, a landmark hotel in Anchorage, refurbished it and brought in Hilton Hotels to manage it. Eventually Hilton bought the hotel, a transaction in which BBNC made a nice profit, Hawkins said.The corporation bought Peter Pan in its early years, when it seemed logical to be in commercial fishing, in which many Bristol Bay shareholders also were engaged. But Peter Pan turned out to be too big for BBNC to adequately finance, Hawkins said."The tail was wagging the dog," he said. The annual "pack," or start-up and operating, loans needed for the company were tough for the corporation to handle, particularly at then-prevailing high interest rates, Hawkins said. Peter Pan was sold at a profit and luckily just before a downtown in the fishing business.Reflecting on BBNC’s recent investment in Northwest Retail Ventures, which operated the Alaska Marketplace stores, Hawkins felt the business plan was good, but financial difficulties prevented Associated Grocers, the majority partner, from fulfilling key parts of the business plan.The deal also was troubled from the start because the state of Alaska, in negotiating the divestiture of grocery stores when Safeway Inc. acquired the Carrs grocery chain, allowed Safeway to divest its lower-performing stores, according to BBNC sources.

Movers & Shakers February 25, 2001

Keith A. Laufer and Joseph N. Levesque have become members of the law firm Foster Pepper Rubini & Reeves. Laufer focuses his practice on corporate and real estate law. Laufer previously served as financial and legal affairs manager for the Alaska Industrial Development and Export Authority and as an assistant attorney general for the State of Alaska. Levesque focuses his practice on general municipal law and litigation. Levesque previously served as borough attorney for the North Slope Borough. Napoleon Ebro has been appointed engineer/checker for HCI Steel Building Systems’ West Coast operations that include Alaska. Ebro, who has relocated from a 12-year assignment in Saudi Arabia, has 20 years experience in both pre-engineered steel buildings and structural steel. Rob Recine has been chosen managing partner of the Alaska general office of New York Life Insurance Co. Recine, a chartered life underwriter and a chartered financial consultant, is New York Life’s top executive in Alaska overseeing 55 agents and nine support staff. Recine joined New York Life in 1994. Christopher Lease has joined the Fairbanks office of USKH Inc. as a computer-aided drafting design technician. Lease received a bachelor’s degree in architecture from Kent State University in Ohio. Evelyn Rousso recently joined USKH Inc. as a project architect working primarily in the firm’s Juneau office. Rousso is a member of the American Institute of Architects. Rousso’s previous projects included the Skagway Air Terminal, the Alaska National Guard Armory in Juneau and renovations at Valley Park School in Ketchikan. John Layton, payment systems manager at Denali Alaskan Federal Credit Union, has received the Accredited Automated Clearing House Professional designation from the National Automated Clearing House Association. To earn the designation, Layton passed tests demonstrating knowledge of managing electronic payment services, appropriate federal regulations, the association’s rules and regulations as well as required technical skills. The Alaska Rural Electric Co-op Association has appointed Britt Sandberg insurance underwriter. Sandberg has more than 16 years experience in the insurance industry and previously served as a workers’ compensation underwriter II with Fremont Compensation Insurance Group in Anchorage. Catholic Social Services has hired Gene Faulk as the agency’s special events coordinator. Faulk primarily will focus on developing fund-raising events to support CSS programs. Faulk has more than 10 years of experience in marketing and coordinating community events. Michael Saville joins the agency as its director of finance. Saville served 18 years as administrator of finance and operations for Hope Community Resources and most recently as accounting manager for Assets Inc. Darcy Mollet will serve as Family Pathfinders coordinator for CSS’ Beyond Shelter Program. Mollet will be responsible for recruiting and training community groups to help families transition from welfare to work. Mikunda, Cottrell & Co. has promoted John McIntyre to senior tax manager. McIntyre is a certified public accountant and a certified specialist in estate planning. McIntyre has been employed by firm since 1996. Steve Elliott has been hired as manager of the small business accounting and consulting department for Mikunda, Cottrell & Co. Elliott is completing the final course of the University of Alaska Anchorage’s master of business administration program. The Anchorage Concert Association board of directors has appointed Ruth Glenn as executive director. Glenn has been with the association since 1989 and has served as deputy director since 1997. Glenn was appointed acting executive director in 2000. Jayson Smart has joined the Anchorage Concert Association as marketing director. Smart previously managed the University of Alaska Anchorage Concert Program and UAA’s Conference and Casting Services. Lisa J. Moore has been promoted to business and events director. Moore previously served as office manager. Lainie Dreas has been promoted to education and events director. Dreas previously served as events manager.  

Wave Wholesale in Chapter 11, halts Bethel project, shutters other businesses

BETHEL -- Wave Wholesale Co. has halted construction of a retail center in Bethel, laid off workers and plans to sell off some businesses as part of its effort to reorganize under federal bankruptcy protection, company officials said.The company filed for Chapter 11 bankruptcy protection Jan. 12. It has 120 days from that date to come up with a reorganization plan.Wave Wholesale was formed 3 1/2 years ago as a cooperative to supply groceries to village stores. The collective buying power of the cooperative helped to bring down prices at 60 village stores. The company also has a wholesale operation that served schools, hospitals and other big customers in Western Alaska.Jerry Dunn, manager of Wave Wholesale, told The Tundra Drums the company grew too quickly."We just acquired too many businesses and didn’t have the money to take care of them," Dunn said. The company has $15 million in debts and $15 million in assets, he said.The company’s financial troubles were compounded by the Western Alaska salmon disaster, which left some customers unable to pay their bills at village stores. The stores were then unable to pay Wave for supplies bought on credit.The company is backing away from plans to build the Wave Center in Bethel, which would have housed a retail grocery store, a movie theater, restaurants and a bank. Dunn said it was unlikely that the company will go forward with the project, and Wave is considering selling the land.The company’s financial problems have led to the layoffs of 28 workers in Fairbanks and Anchorage."It’s unfortunate but it’s something we have to do," Dunn said.The company has closed its Fairbanks warehouse, halted its food service operations and is deciding what to do with its other acquisitions, which include a general store in Unalakleet, Northwest Motorsports in Kotzebue and a gift shop at the Alaska Native Heritage Center in Anchorage.Wave Wholesale was formed by two Native regional corporations -- NANA Regional Corp. and Calista Corp. -- as well as 15 Native village corporations.

How to avoid taxes on gifts to grandchildren

Most people are aware that any gift exceeding $10,000 per year constitutes a taxable gift and that once lifetime taxable gifts exceed $675,000, gift taxes are imposed on additional taxable gifts. Taxable gifts made to grandchildren or others who are considered more than one generation removed from the donor, are subject to a second tax, the generation-skipping transfer, or GST, tax. This tax is imposed on taxable gifts exceeding the lifetime exemption amount of $1,030,000 (as of 2001, indexed annually for inflation). Early planning can yield great benefits with the generation-skipping transfer tax exemption. You might want to consider creating a trust, which can be used for funding and owning a new business. First, the trust can be funded with cash; the trust can then purchase a business interest. This strategy avoids valuation challenges if the business interest appreciates rapidly and minimizes the initial GST tax-exempt allocation. Other GST tax planning opportunities include: * Maximize the direct payment of college and medical expenses that are exempt from gift tax and disregard them when computing the $10,000 annual gift tax exclusion. * Consider making as many $10,000 annual exclusion gifts as possible. A powerful way to use the annual exclusion is to take advantage of Section 529 qualified state tuition programs. A grandparent may give up to $50,000 per grandchild and spread this amount over five years and shield the gift from tax by using the annual exclusion. The income on a qualified state tuition program account grows tax-free, and the grandchild is taxed when he or she withdraws the funds for college education expenses. * Use the $1,030,000 GST tax exemption during your lifetime and focus on leveraging the transfer with assets with the greatest potential for appreciation. Long-term GST trusts should be created for the exclusive benefit of grandchildren, if the parents can afford to forgo the income. If children need trust income, consider making them discretionary, rather than mandatory, beneficiaries. The optimal trust term to defer transfer taxes is a trust that will end on the expiration of the period established by the Rule Against Perpetuities limitation. Alaska, Delaware and other jurisdictions that have abolished the rule make excellent jurisdictions to establish dynasty trusts, designed to build up as much trust corpus as possible for future generations. When designing a dynasty-type trust, a trustee should have broad discretionary powers, including the power to make distributions. To optimize a transfer of wealth to future generations, a trust should purchase assets, such as a business or a home, for grandchildren’s use. Senior family members should consider loaning money to a GST trust to invest in new business opportunities. Charitable lead unitrusts are also useful in GST tax-exemption planning. Charitable lead unitrusts are more attractive, because a GST tax exemption can be allocated when the trust is funded; the GST tax exemption can be allocated only after the charity’s income interest has expired for a charitable lead annuity trust. A charitable lead unitrust should be considered only if it is estimated that trust assets will perform at a rate of return in excess of the Section 7520 rate, which is computed on the value of partnership interests, after any relevant discounts are considered. A possible strategy to exceed the Section 7520 rate is to first place assets in a family limited partnership, or FLP, and contribute partnership interests to a unitrust. The prohibitions against self-dealing apply to charitable trusts. Charitable trusts should not purchase an asset from a related party, including the grantor’s FLP or closely held business. Also, the self-dealing rules apply if a beneficiary uses trust property. John McIntyre is senior tax manager at Mikunda, Cottrell & Co.

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