[Congressional Record Volume 145, Number 91 (Thursday, June 24, 1999)]
[Extensions of Remarks]
[Pages E1393-E1394]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




   INTRODUCTION OF A BILL TO CLARIFY THE TAX TREATMENT OF SETTLEMENT 
 TRUSTS ESTABLISHED PURSUANT TO THE ALASKA NATIVE CLAIMS SETTLEMENT ACT

                                 ______
                                 

                             HON. DON YOUNG

                               of alaska

                    in the house of representatives

                        Thursday, June 24, 1999

  Mr. YOUNG of Alaska. Mr. Speaker, today I am introducing a bill to 
clarify the tax treatment of Settlement Trusts authorized by the Alaska 
Native Claims Settlement Act. This legislation is very similar to a 
bill that I introduced with my colleagues, Congressman George Miller 
and J.D. Hayworth, last Congress.
  The bill has been further improved from last Congress and a companion 
measure was introduced in the Senate recently. This bill will be cited 
as the ``Alaska Native Claims Settlement Act Settlement Trusts Remedial 
Tax Act of 1999''.
  Federal law first authorized settlement trusts in 1988 to permit 
Alaska Native Corporations to provide a variety of benefits to their 
shareholders in a long term permanent manner. Present law requires 
settlement trusts to report tax information to their beneficiaries on 
Form K-1, rather than Form 1099 which corporations use. This causes 
confusion to the beneficiaries and encourages misreporting of income. 
This legislation requires all settlement trusts to use Form 1099.
  In recent years I have written to the Chairman of the Ways and Means 
Committee informing him that what had 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 objectives envisioned for Settlement Trusts.
  Therefore, I am pleased that, on a bipartisan basis, I can join my 
colleague and Ranking Minority Member on the Resources Committee, Mr. 
Miller, and my other distinguished colleagues Mr. Hayworth, Mr. Kildee 
and at least 16 other cosponsors to introduce this important remedial 
legislation. I am attaching a brief summary and section by section 
analysis of the legislation.

              SETTLEMENT TRUST CORRECTIVE TAX LEGISLATION

       Federal law first authorized settlement trusts in 1988 to 
     permit Alaska Native corporations to provide a variety of 
     benefits for their Native shareholders in a long term, 
     permanent fashion. Although Alaska Native corporations are 
     not governments, they do provide many social services to 
     their shareholders. We have worked with the Treasury 
     Department on the proposed legislation, which clarifies 
     present law and provides an elective tax structure to 
     encourage use of these trusts as follows:
       (1) Contributions to an electing settlement trust are not 
     taxable to the shareholders. Present IRS ruling policy is 
     that contributions to settlement trusts are deemed 
     distributions to the Native corporation's shareholders. If 
     that corporation has earnings and profits under the tax law, 
     the deemed distributions will then be taxable to the 
     shareholders even though they have not actually received any 
     money. The legislation eliminates this significant 
     disincentive by providing that contributions to an electing 
     trust are not currently taxable to the shareholders.
       (2) Permit electing settlement trusts to retain up to 45% 
     of their annual taxable income without adverse tax 
     consequences. Present law imposes a severe penalty for 
     inflation proofing these trusts (which permits constant 
     dollar benefits to be provided), by taxing reinvested income 
     at the maximum individual tax rates (presently 39.6 percent). 
     The legislation provides that up to 45 percent of the trust's 
     annual income can be reinvested in the trust without current 
     taxation, but this reinvested income will be eventually 
     taxable at ordinary income rates to shareholders when 
     distributed. This treatment continues so long as the only 
     persons who hold the beneficial interests in the trust are 
     persons who could hold the Native corporation's own stock.
       (3) Impose severe penalties on electing settlement trusts 
     which no longer benefit Alaska Natives. The settlement trust 
     election is intended to benefit Alaska Natives. In the event 
     that a settlement trust ceases to benefit Alaska Natives, the 
     trust will no longer be permitted to receive the elective 
     benefits discussed above. In addition, unless the trust 
     terminates through a distribution of its assets, a one-time 
     tax is imposed at the highest marginal income tax rates upon 
     the value of the trust's assets.
       (4) Require withholding on certain trust distributions. 
     Present law does not require any income tax withholding on 
     trust distributions. Under the proposed legislation, 
     withholding on distributions by any settlement trust is 
     required to the extent the annualized distributions exceed 
     the basic standard deduction and personal exemption amounts 
     under the Tax Code.
       (5) Modify information reporting requirements. Present law 
     requires settlement trusts to report tax information to their 
     beneficiaries on Form K-1, rather than Form 1099 which 
     corporations use. This causes confusion to the beneficiaries 
     and encourages misreporting of income. The proposed 
     legislation requires all settlement trusts to use Form 1099.

[[Page E1394]]

                      Section-by-Section Analysis


            ANCSA Settlement Trust Remedial Tax Legislation

       Federal law authorized in 1988 Alaska Native corporations 
     to use their own funds to establish settlement trusts to 
     ``promote the health, education and welfare of its 
     beneficiaries and preserve the heritage and culture of 
     Natives.'' Although Alaska Native corporations are not 
     governments, they do help provide certain social services as 
     contemplated in the Alaska Native Claims Settlement Act 
     (ANCSA) to their shareholders. This proposed legislation 
     corrects several deficiencies in and clarifies present law 
     while providing an elective tax structure to lessen the 
     current impediments to the establishment and maintenance of 
     these trusts. The following is a section-by-section analysis 
     of the legislation:
       Section 1 is the Short Title of the bill.
       Section 2(a) (identification of ANCSA settlement trust as 
     eligible to elect tax exempt status). This provision of the 
     legislation provides a partial exemption from income taxes 
     for Alaska Native Settlement Trusts which make a one-time 
     election. The partial exemption is accomplished by adding 
     settlement trusts as entities which can be tax exempt under 
     Tax Code section 501(c), and then requiring that to qualify 
     for the tax exemption a settlement trust must currently 
     distribute at least 55% of its annual taxable income.
       Section 2(b) (detailing new 501(p) elective tax treatment). 
     New subsection 501(p) has six paragraphs.
       Paragraph (1) describes the taxation of both electing and 
     non-electing settlement trusts. Contributions to electing 
     trusts are not currently taxable to the beneficiaries; by 
     contrast, current IRS ruling policy is that contributions to 
     non-electing trusts are currently taxable to beneficiaries to 
     the extent of corporate earnings and profits. Electing trusts 
     will be tax exempt if they currently distribute 55% of their 
     income and if transfers of trust units are restricted 
     similarly to transfers of ANCSA corporate stock. Eventual 
     distributions to beneficiaries of the trust's exempt income, 
     as well as any other distributions by the electing trust, are 
     taxed to the beneficiaries at ordinary income rates. Non-
     electing trusts remain subject to present law.
       Paragraph (2) provides the basic mechanism by which a 
     settlement trust elects tax exemption. Paragraph (3) imposes 
     a rule to assure that primarily Alaska Natives receive the 
     benefits of this elective tax exemption, just as the Alaska 
     Native Claims Settlement Act (43 USC 1601 et seq.) limits 
     transferability of the stock in Native corporations to assure 
     that the benefits of stock ownership accrue primarily to 
     Alaska Natives. Under this bill, if at any time the 
     beneficial interests in an electing trust become transferable 
     in a manner which would be prohibited if those beneficial 
     interests were ANCSA stock, the trust becomes permanently 
     ineligible to continue the election. Also, a one-time penalty 
     tax equal to the highest marginal tax rate under section 1(e) 
     times the asset value of the trust is imposed. This tax can 
     be avoided by a distribution of the trust assets to the 
     beneficiaries before the close of the taxable year in which 
     the trust beneficial interests became transferable. Paragraph 
     (3) also causes the foregoing rule to apply if a Native 
     corporation which is not governed by the non-transferability 
     rules makes a transfer to an electing settlement trust.
       Paragraph (4) imposes an annual distribution requirement 
     (55% of taxable income) on electing trusts. The consequence 
     of a failure to make these annual distributions is a non-
     deductible tax at ordinary income rates upon the income which 
     should have been distributed.
       Paragraph (5) describes the taxation of the beneficiaries 
     of both electing and non-electing trusts. All distributions 
     to a beneficiary of an electing trust produce ordinary 
     income. But for this rule, the character of income earned by 
     the trust would flow out to the beneficiaries and 
     distributions of capital and accumulated income would be tax 
     free to the beneficiaries. Distributions by a non-electing 
     trust are taxable to the extent required by Subchapter J of 
     the Tax Code, which generally limits beneficiary taxation to 
     the amount of income of the trust and flows the character of 
     the trust's income out to the beneficiary.
       Paragraph (6) provides certain definitions applicable to 
     the election.
       Section 2(c) (Withholding on distributions by electing 
     trusts). Present law does not require any tax withholding on 
     trust distributions. Many Alaska Natives have income levels 
     so low that they are not required to file income tax returns. 
     In such circumstances, requiring withholding on distributions 
     increases the administrative burden to both the government 
     and settlement trusts since these Alaska Natives would have 
     to apply for refunds of over collected taxes. Therefore, 
     under this legislation, withholding on distributions by any 
     settlement trust is required to the extent the annualized 
     distributions of the Trust exceed the basic standard 
     deduction and personal exemption amounts under the Tax Code.
       Section 2(d) (Modify information reporting requirements.) 
     Under present law, settlement trusts report to their 
     beneficiaries on Form K-1s, which with extensions, can be 
     sent as late as October of the year following the taxable 
     year to which the information relates. Much of Form K-1 is 
     inapplicable to the typical settlement trust and can be 
     confusing to beneficiaries. Native corporations, by contrast, 
     have long reported to their shareholders on Form 1099s which 
     must be sent by January 31 of the following year. This 
     section requires all settlement trusts to provide annual 
     information on Form 1099s (rather than on Forms K-1s). In the 
     case of a non-electing settlement trust, the From 1099 would 
     differentiate among the different types and character of 
     income being distributed. Form 1099 reporting would be in 
     lieu of the requirement that a non-electing settlement trust 
     attach a copy of beneficiary Form K-1s to its own tax return.
       Section 2(e) (effective date). In general, the provisions 
     of the bill are applicable to taxable years ending after the 
     date of enactment of the bill and to contributions to trusts 
     made after such date.

     

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