Ice fishing; how Pillsbury, Quaker Oats, and Drexel Burnham got millions in cool cash from Alaska's Eskimos.

• Author: Ortega, Bob
• Position: Scams, Hustles, and Boondoggles

Ice Fishing

It was midnight when the Nome fire siren began to howl. Charlie Johnson, an Eskimo from the tiny village of White Mountain, was in a good mood as he walked past the bars that line Front Street. Earlier that day, a council of Alaska native leaders had agreed to a plan that Johnson hoped would shore up dozens of native corporations teetering on the verge of bankruptcy. Now Johnson and several of those leaders gathered at the siren's call to watch the end of a thousand-mile dog sled race from Anchorage. What Johnson didn't realize was that he was about to begin his own odyssey--one that would lead him 5,000 miles away to Capitol Hill and start a stampede of investment bankers to Alaska, line the pockets of lawyers and accountants by the score, and rip open a tax loophole that to date may have cost the U.S. Treasury $1 billion. All he had in mind was balancing the books.

In 1971, Alaska's natives won a giant settlement of their vast ownership claims on the state's territory. Instead of paying straight cash, or establishing reservations (as had been done with tribes in the lower 48 states), Congress created native corporations to manage the lands and money turned over in the settlement.

Now, 13 years later, Johnson, as president of one of those corporations, faced the prospect of having to tell his fellow shareholders that their most precious heritage--the land--was in danger of being lost through foreclosure. Many of the 187 native corporations faced the same danger, because they'd pledged land as collateral for business loans that had gone sour. But Johnson thought he'd found a way out--a potential tax loophole that would allow the native corporations to sell their losses to profitable companies seeking tax write-offs. If Pillsbury needed a $10 million tax credit, it could just buy it for, say, $7 million or $8 million from a native corporation. The native corporations get cash, the companies get a juicy tax break, and the U.S. Treasury loses money.

The plan would succeed beyond Johnson's wildest dreams. In the four years since that meeting in Nome, native corporations have made roughly 100 such sales, according to state financial records. I've been able to obtain figures for one-fourth of those transactions--and they show that in those cases alone the native corporations have picked up more than $500 million, at a cost to the federal government of more than $650 million in lost taxes. That $150 million difference is money lining the pockets of Drexel Burnham Lambert, Pillsbury, Marriott, Quaker Oats, Campbell Soup, and other wealthy corporations. With three-fourths of the records unavailable, even a conservative estimate would double the amount if all loss sales were known.

Since 1984, courtesy of Congress, Alaska's native corporations have been the only ones allowed to sell their losses to businesses seeking tax write-offs. Before that, many American corporations had sold their losses, costing the treasury billions of dollars. Congress closed that loophole, but exempted the native corporations. An amendment in the 1986 Tax Reform Act extended that exemption until 1991 to help ailing native corporations get back on their feet. At the time, Congress thought the measure would cost only about $50 million in lost federal revenue.

Because of the secrecy surrounding many of the deals, it's only recently that anyone in Congress has come close to realizing the full extent of the losses. In late April, Dan Rostenkowski, chairman of the House Ways and Means committee, introduced a bill to end the exemption, which has cost at least 13 times as much as originally predicted. "No one really knows how much it's cost so far, or how much more it may cost," said a Ways and Means committee aide. (In part, that's because native corporations are exempt from most Securities and Exchange Commission reporting requirements.) "But," continued the aide, "it's clearly a lot more than Congress intended."

The native corporations respond that they've done nothing that other businesses haven't also done. "I find it hard to apologize for making shrewd business decisions, particularly when others also receive... government financial incentives," wrote Byron Mallott, chief executive officer of the native corporation Sealaska, in a public letter last year. They argue the criticism being leveled against them is part of a larger pattern through which whites manipulate the law while natives suffer.

A series of articles published by The Philadelphia Inquirer in April bears out the fact that tax breaks haven't been reserved for Alaska natives alone. The paper found at least 650 exemptions in the...