[Congressional Record Volume 144, Number 86 (Friday, June 26, 1998)]
[Extensions of Remarks]
[Pages E1275-E1276]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




      INTRODUCTION OF REMEDIAL ANCSA SETTLEMENT TRUST LEGISLATION

                                 ______
                                 

                             HON. DON YOUNG

                               of alaska

                    in the house of representatives

                        Thursday, June 25, 1998

  Mr. YOUNG of Alaska. Mr. Speaker, today I am pleased to introduce 
legislation which will enable Alaska Native Settlement Trusts to 
achieve the goals envisioned for them by the Congress in the original 
authorizing legislation: to encourage Alaska Native Corporation to use 
their own assets to provide segregated, protected funds to ``promote 
the health, education, and welfare of . . . (Settlement Trust) 
beneficiaries and preserve the heritage and culture of Natives.'' 
Settlement trusts have been impeded from achieving the laudatory goals 
originally envisaged because of deficiencies in the original 
legislation and impediments arising from certain IRS interpretations as 
well as inflexibility in current tax administration with regard to the 
trust.
  In recent years I have written to the Chairman of the Ways and Means 
Committee informing him that what has started as a simple proposition, 
promoted by Congress in the Settlement Trust legislation--to provide 
aid from a protected source to Alaska Natives who often have very 
little in other available assets to sustain them and in particular in 
their retirement years--had become a complex and bewildering situation 
which frustrated the use of the settlement trust provisions in law. 
This result stems from an IRS interpretation calling for the immediate 
taxation to potential beneficiaries when these trusts are established 
by Alaska Native corporations which have earnings and profits, as 
opposed to taxation when the money is actually received by the 
beneficiaries. Put simply, in the case of some beneficiaries, 
particularly the elderly, who have to prepay taxes in order to receive 
their benefits and, if they die prematurely, they will not even receive 
the amount of their prepaid taxes back. Needless to say, this is a 
substantial impediment to setting up and continuing such beneficial 
trusts.
  But those Native corporations having favorable tax situations which 
enable them to make contributions to trusts which are not immediately 
taxable to their beneficiaries face other impediments. The IRS has 
taken the position that there is no authority to withhold tax from 
beneficiary payments, which prevents a simple way for a Native to pay 
his or her tax. The IRS requires that trust reporting to beneficiaries 
be accomplished via the complex so-called ``K-1'' form as opposed to 
the simple 1099 form, so familiar to most of us. As you can imagine, 
the requirement to use the former, particularly in rural areas in the 
state of Alaska where accountants may not be readily available, 
presents major reporting problems. We believe the IRS internally has 
been supportive of such a change but has advised in the past that it 
would need to be accomplished by statute.
  Finally, the original authorizing legislation failed to provide a 
mechanism to encourage sustaining the longevity of these trusts 
dedicated to the goals enumerated. Such trusts are currently treated as 
regular trusts and penalized for accumulating income with an assessment 
of the highest marginal tax rate. Accordingly, from the standpoint of a 
settlement trust, it currently makes good tax sense to distribute all 
income to the beneficiaries rather than leaving it to be taxed at the 
current trust tax rate. This, however,does not make good social sense 
and encourages the opposite result one would envision for these 
entities, whose goal is to sustain the funds on a long-term basis in 
order to fulfill the objective envisioned for Settlement Trusts.
  Accordingly, Mr. Speaker, Congressman Miller and Congressman 
Hayworth, and I

[[Page E1276]]

are today introducing legislation today which will rectify these 
problems and facilities settlement trusts functioning in a manner more 
in keeping with the underlying goals of the Alaska Native Claims 
Settlement Act. In general, this legislation provides that:
  1. Contributions to settlement trusts will not result in immediate 
taxation to beneficiaries. In the case of ANCSA corporations which have 
earnings and profits at the time of transfer, any and all distributions 
from the trust of either principal or interest, will be taxable as 
ordinary income to the beneficiaries when received up to the amount 
which would have been subject to taxation under present IRS rulings. 
This replicates the taxation presently imposed by the IRS but delays it 
from the establishment of the trust to the distribution to 
beneficiaries, which is clearly the proper point of taxation. It should 
be noted that currently, the distribution of principal is not taxable. 
This provision provides for the taxation of such distribution as part 
of the overall balance worked into the bill.

  2. A settlement trust will be able to defer taxation of up to 45% of 
its current income in order to ``inflation proof'' and not dissipate 
the principal. However, when this deferred income is ultimately 
distributed to beneficiaries, they will be taxes at ordinary income 
rates rather than at more favorable capital gains rates or, in some 
cases at present, not taxed at all.
  3. Beneficiaries of settlement trusts will be able to have up to 15% 
of their distributions by the trust withheld to satisfy their 
anticipated federal income tax obligations. This will obviously speed 
up and help insure IRS collections.
  4. A settlement trust will be able to issue form 1009's to 
beneficiaries which should greatly simplify their reporting and again 
enhance tax collections.
  Mr. Speaker, in the development of this bill, a serious effort has 
been made to address concerns raised during discussions with Department 
of Treasury officials as well as with representatives of the Joint 
Committee on Taxation. Substantial information has been provided 
already to the Joint Tax Committee to help permit the committee to make 
a realistic revenue estimate. In this regard, it is our belief that by 
providing offsetting tax measures in the bill and speeding up and 
otherwise enhancing the collections of tax, we believe that the 
legislation we introduce today should be essentially revenue neutral.
  In sum, such trusts were intended to provide for the segregation of 
Native assets, to immunize such assets from potential dissipation 
through business ventures (or premature distributions) or otherwise and 
to provide a fund which would remain intact fort a substantial period 
of time and hence contribute to the health, education, welfare, 
heritage and cultural objectives in the current settlement trust 
statute for years to come. Unfortunately, general tax interpretations 
and policy, established for far different reasons, have hampered these 
Congressional goals and objectives.
  Therefore, I am pleased that, on a bipartisan basis, I can join with 
my colleague and Ranking Minority Member on the Resources Committee, 
Mr. Miller, and my other distinguished colleagues Mr. Hayworth to 
introduce this important remedial legislation.

       Narrative Explanation For Settlement Trust Tax Legislation


                           bill section 1(a)

  Identification of ANCSA Settlement Trusts As Eligible To Elect Tax 
                             Exempt Status

       This provision of the draft legislation permits settlement 
     trusts organized under the Alaska native Claims Settlement 
     Act, 43 U.S.C. 1601 et seq. (ANCSA), to elect tax exempt 
     status.


                           bill section 1(b)

 Detailing Tax Treatment For Settlement Trusts And Their Beneficiaries

       This new subsection amends the Tax Code to add a new 
     section 501(p), which is comprised of six paragraphs 
     clarifying the tax treatment of ANCSA settlement trusts.
       Paragraph (1) provides that contributions to ANCSA 
     settlement trusts are not deemed distributions to the ANCSA 
     corporation's shareholders--the conveyance to the trust does 
     not trigger taxation to the beneficiaries. Paragraph (1) 
     applies whether or not a settlement trust has made the (p)(2) 
     election, and alters an existing IRS ruling posture which has 
     operated as a disincentive to contributions to settlement 
     trusts by taxing beneficiaries prior to their receipt of 
     distributions. However, as noted below, the draft legislation 
     further provides that if an ANCSA corporation has earnings 
     and profits for the taxable year of a contribution, those 
     earnings and profits (up to the amount of the contribution) 
     must be transferred to the trust. Subsequent distributions by 
     the trust will produce ordinary income to the beneficiaries, 
     until these transferred earnings and profits are exhausted. 
     This transfer of earnings and profits eliminates the 
     possibility that settlement trusts could be used to bail out 
     corporate earnings and profits.
       Paragraph (2) provides the basic mechanism by which a 
     settlement trust elects tax exempt status. In general under 
     the legislation an electing settlement trust must meet two 
     requirements to be tax exempt. First, the trust must timely 
     file for the election as prescribed. Second, the beneficial 
     interests in the trust must abide by alienation restrictions 
     which prohibit transfers of trust units in the same manner 
     that transfers of ANCSA corporate stock are prohibited; 
     failure to do so results in revocation of the election. If an 
     electing trust violates the alienation restrictions at any 
     point during a taxable year, the section 501(p) election will 
     be automatically revoked for that year and all subsequent 
     years. Once the section 501(p) election is evoked, that trust 
     would not be able to reelect.
       Paragraph (3) provides the distribution requirements for an 
     electing trust in the amount of 55% of adjustable taxable 
     income. If an electing trust fails to meet this requirement, 
     it is taxable at the maximum individual tax rates (presently 
     39.6%) on whatever amount it would have had to distribute to 
     meet the 55% requirement. As an example, if an electing trust 
     distributed only 50% of its taxable income for a given year, 
     then 5% (55% requirement less 50% actually distributed) would 
     be subject to tax.
       Paragraph (4) describes the taxation of the beneficiaries 
     of settlement trusts. Subparagraph (4)(A) applies to electing 
     settlement trusts and imposes a rule that distributions by 
     such trusts are automatically taxable as ordinary income 
     regardless of the source of those distributions. This would 
     include amounts retained without tax incidence at the trust 
     level which are subsequently distributed to beneficiaries. 
     Subparagraph (4)(B) applies to trusts which have not made the 
     new subsection 501(p)(2) election. If the ANCSA corporation 
     does not have earnings and profits for tax purposes when a 
     contribution is made to a settlement trust, subsequent 
     distributions by that trust are taxable to the beneficiaries 
     under the existing rules of Subchapter J of the Code. In 
     general, under existing law the character of income earned by 
     the trust would flow out to the beneficiaries and 
     distributions of capital and accumulated income are tax free.
       On the other hand, if the ANCSA corporation has earnings 
     and profits when a contribution is made to a settlement 
     trust, further rules apply. The contribution is deemed to 
     transfer the corporation's earnings and profits up to the 
     amount of the contribution to the settlement trust. 
     Subsequent distributions by the trust to its beneficiaries 
     will be deemed to come from these transferred earnings and 
     profits and produce ordinary income to the beneficiaries, the 
     same as would occur if the ANCSA corporation had distributed 
     those earnings and profits directly. This treatment continues 
     until the trust has fully distributed the amount of the 
     transferred earnings and profits. Only thereafter is taxation 
     of the beneficiaries controlled by Subchapter J.
       Paragraph (5) permits beneficiaries to elect to have up to 
     15% of their distributions by the trust withheld from their 
     ongoing trust distributions to satisfy their anticipated 
     federal income tax obligations. This paragraph applies 
     whether or not a settlement trust has made the 501(p)92) 
     election.
       Paragraph (6) defines a settlement trust with reference to 
     ANCSA.


                           Bill Section 1(c)

                         Information Reporting

       Section 1(c) provides a mechanism to permit beneficiary 
     reporting under form 1099. Annual information reporting on 
     form 1099 reporting is advantageous for all settlement 
     trusts, even where taxability for beneficiaries is determined 
     under Subchapter J (i.e. as to non electing trusts which have 
     no transferred earnings and profits). In the case of a non 
     electing settlement trust, the 1099 would differentiate among 
     the different types and character of income being 
     distributed. Also, 1099 reporting would be in lieu of the 
     existing requirement that a non electing settlement trust 
     attach a copy of beneficiary K-1s to its own tax return.


                           Bill Section 1(d)

                             Effective Date

       The provisions of the bill are applicable to taxable years 
     beginning and contributions made after December 31, 1996.

     

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