§646 Tax Treatment of Electing Alaska Native Settlement Trusts

Summary

An electing Settlement Trust and its beneficiaries follow special federal tax rules when the trust’s trustee makes the one-time election. The trust pays tax on its taxable income (other than net capital gain) at the lowest rate shown in section 1(c). If the trust has a net capital gain, that gain is taxed at the rate that would apply if the trust’s other income were taxed only at the lowest rate in section 1(c). These taxes replace the usual income tax on that income. The trustee must make the election by the due date (including extensions) for the trust’s tax return for the first taxable year ending after the law was passed and must attach a statement to that return. Once made, the election covers that year and all later years and generally can’t be revoked, except under special transfer rules. Contributions to an electing trust are not taxed to beneficiaries, and the sponsoring Native Corporation’s earnings aren’t reduced because of those contributions. When the trust pays out money to beneficiaries, the payments are treated in a four-step order: first, as amounts excluded up to the trust’s taxable income (minus tax the trust paid) and certain tax-exempt items; second, as excluded to the extent of unused prior-year exclusions while the election was in effect; third, as distributions tied to the sponsoring Native Corporation’s earnings and profits; and fourth, as amounts over the trust’s distributable net income. If the trust’s interests or the sponsoring corporation’s stock can later be transferred in ways not allowed by section 7(h) of the Alaska Native Claims Settlement Act, no election can be made and any existing election ends at the start of the year transfers are first allowed, with special rules increasing the trust’s distributable income by the corporation’s earnings (but not above the trust’s fair market value). The trust’s taxable income is figured under section 641(b) without certain deductions. Key terms: electing Settlement Trust (a trust that made the election), Native Corporation, Settlement Common Stock, Settlement Trust, and sponsoring Native Corporation. Any shareholder loss on sponsoring corporation stock is reduced by a per-share adjustment equal to aggregate contributions to that corporation’s electing trusts expressed per share. For reporting rules see section 6039H.