§646 — Title 26 Internal Revenue Code | U.S. Code

§646 Tax Treatment of Electing Alaska Native Settlement Trusts

Title 26 › Subtitle Subtitle A— Income Taxes › Chapter 1— NORMAL TAXES AND SURTAXES › Subchapter J— Estates, Trusts, Beneficiaries, and Decedents › Part I— ESTATES, TRUSTS, AND BENEFICIARIES › Subpart A— General Rules for Taxation of Estates and Trusts › § 646

Last updated Apr 5, 2026|Official source

Summary

If a Settlement Trust chooses these rules, the trust and its beneficiaries use the tax treatment described here. The trust pays tax on its taxable income (except net capital gain) at the lowest rate found in section 1(c). Any net capital gain of the trust is taxed at the rate that would apply if the trust’s other income were taxed only at that lowest rate. The trustee must make the choice by attaching a statement to the trust’s tax return for the first taxable year ending after the law took effect, filed by the return’s due date (including extensions). Once made, the choice applies to that year and later years and cannot be revoked, except in certain cases below. Contributions to an electing trust are not included in a beneficiary’s income, and the sponsoring Native Corporation’s earnings are not reduced by those contributions. Distributions to beneficiaries are treated in four steps: first, excluded up to the trust’s taxable income for the year (less tax paid by the trust) and certain other exclusions; second, excluded up to any remaining cumulative amounts allowed while the election is in effect; third, treated as distributions from the sponsoring Native Corporation to the extent of its earnings and profits; and fourth, any excess beyond the trust’s distributable net income. If interests or stock can be transferred in ways not allowed under section 7(h) of the Alaska Native Claims Settlement Act, the trust cannot elect (or the election ends) and the trust’s distributable net income is adjusted to include the sponsoring corporation’s earnings. Taxable income for the trust is figured under section 641(b) without deductions under sections 651 or 661. Key terms: electing Settlement Trust (trust that made the choice); Native Corporation, Settlement Common Stock, and Settlement Trust (as defined in ANCSA); sponsoring Native Corporation (the corporation that transfers assets to the trust). A shareholder’s loss on sponsoring-corporation stock is reduced (not below zero) by a per-share factor based on contributions to electing trusts. Information reporting rules apply under section 6039H.

Title 26, §646

Internal Revenue Code — Source: USLM XML via OLRC

(a)If an election under this section is in effect with respect to any Settlement Trust, the provisions of this section shall apply in determining the income tax treatment of the Settlement Trust and its beneficiaries with respect to the Settlement Trust.

(b)Except as provided in subsection (f)(1)(B)(ii)—

(1)There is hereby imposed on the taxable income of an electing Settlement Trust, other than its net capital gain, a tax at the lowest rate specified in section 1(c).11 See References in Text note below.

(2)In the case of an electing Settlement Trust with a net capital gain for the taxable year, a tax is hereby imposed on such gain at the rate of tax which would apply to such gain if the taxpayer were subject to a tax on its other taxable income at only the lowest rate specified in section 1(c).

(c)(1)A Settlement Trust may elect to have the provisions of this section apply to the trust and its beneficiaries.

(2)An election under paragraph (1) shall be made by the trustee of such trust—

(A)on or before the due date (including extensions) for filing the Settlement Trust’s return of tax for the first taxable year of such trust ending after the date of the enactment of this section, and

(B)by attaching to such return of tax a statement specifically providing for such election.

(3)Except as provided in subsection (f), an election under this subsection—

(A)shall apply to the first taxable year described in paragraph (2)(A) and all subsequent taxable years, and

(B)may not be revoked once it is made.

(d)(1)In the case of an electing Settlement Trust, no amount shall be includible in the gross income of a beneficiary of such trust by reason of a contribution to such trust.

(2)The earnings and profits of the sponsoring Native Corporation shall not be reduced on account of any contribution to such Settlement Trust.

(e)Amounts distributed by an electing Settlement Trust during any taxable year shall be considered as having the following characteristics in the hands of the recipient beneficiary:

(1)First, as amounts excludable from gross income for the taxable year to the extent of the taxable income of such trust for such taxable year (decreased by any income tax paid by the trust with respect to the income) plus any amount excluded from gross income of the trust under section 103.

(2)Second, as amounts excludable from gross income to the extent of the amount described in paragraph (1) for all taxable years for which an election is in effect under subsection (c) with respect to the trust, and not previously taken into account under paragraph (1).

(3)Third, as amounts distributed by the sponsoring Native Corporation with respect to its stock (within the meaning of section 301(a)) during such taxable year and taxable to the recipient beneficiary as amounts described in section 301(c)(1), to the extent of current or accumulated earnings and profits of the sponsoring Native Corporation as of the close of such taxable year after proper adjustment is made for all distributions made by the sponsoring Native Corporation during such taxable year.

(4)Fourth, as amounts distributed by the trust in excess of the distributable net income of such trust for such taxable year.

(f)(1)If, at any time, a beneficial interest in an electing Settlement Trust may be disposed of to a person in a manner which would not be permitted by section 7(h) of the Alaska Native Claims Settlement Act (43 U.S.C. 1606(h)) if such interest were Settlement Common Stock—

(A)no election may be made under subsection (c) with respect to such trust, and

(B)if such an election is in effect as of such time—

(i)such election shall cease to apply as of the first day of the taxable year in which such disposition is first permitted,

(ii)the provisions of this section shall not apply to such trust for such taxable year and all taxable years thereafter, and

(iii)the distributable net income of such trust shall be increased by the current or accumulated earnings and profits of the sponsoring Native Corporation as of the close of such taxable year after proper adjustment is made for all distributions made by the sponsoring Native Corporation during such taxable year.

(2)If—

(A)stock in the sponsoring Native Corporation may be disposed of to a person in a manner which would not be permitted by section 7(h) of the Alaska Native Claims Settlement Act (43 U.S.C. 1606(h)) if such stock were Settlement Common Stock, and

(B)at any time after such disposition of stock is first permitted, such corporation transfers assets to a Settlement Trust,

(3)For purposes of this section, the surrender of an interest in a Native Corporation or an electing Settlement Trust in order to accomplish the whole or partial redemption of the interest of a shareholder or beneficiary in such corporation or trust, or to accomplish the whole or partial liquidation of such corporation or trust, shall be deemed to be a transfer permitted by section 7(h) of the Alaska Native Claims Settlement Act.

(g)For purposes of this title, the taxable income of an electing Settlement Trust shall be determined under section 641(b) without regard to any deduction under section 651 or 661.

(h)For purposes of this section—

(1)The term “electing Settlement Trust” means a Settlement Trust which has made the election, effective for a taxable year, described in subsection (c).

(2)The term “Native Corporation” has the meaning given such term by section 3(m) of the Alaska Native Claims Settlement Act (43 U.S.C. 1602(m)).

(3)The term “Settlement Common Stock” has the meaning given such term by section 3(p) of the Alaska Native Claims Settlement Act (43 U.S.C. 1602(p)).

(4)The term “Settlement Trust” means a trust that constitutes a settlement trust under section 3(t) of the Alaska Native Claims Settlement Act (43 U.S.C. 1602(t)).

(5)The term “sponsoring Native Corporation” means the Native Corporation which transfers assets to an electing Settlement Trust.

(i)Any loss that would otherwise be recognized by a shareholder upon a disposition of a share of stock of a sponsoring Native Corporation shall be reduced (but not below zero) by the per share loss adjustment factor. The per share loss adjustment factor shall be the aggregate of all contributions to all electing Settlement Trusts sponsored by such Native Corporation made on or after the first day each trust is treated as an electing Settlement Trust expressed on a per share basis and determined as of the day of each such contribution.

(j)For information required with respect to electing Settlement Trusts and sponsoring Native Corporations, see section 6039H.

Notes & Related Subsidiaries

Editorial Notes

References in Text

section 1(c), referred to in subsec. (b), to be treated, for purposes of the rate of tax, as a reference to the corresponding rate bracket under section 1(j)(2)(C) of this title, see section 1(j)(2)(F) of this title. The date of the enactment of this section, referred to in subsec. (c)(2)(A), is the date of enactment of Pub. L. 107–16, which was approved June 7, 2001.

Prior Provisions

A prior section 646 was renumbered section 645 of this title.

Statutory Notes and Related Subsidiaries

Effective Date

Pub. L. 107–16, title VI, § 671(d), June 7, 2001, 115 Stat. 148, provided that: “The

Amendments

made by this section [enacting this section and section 6039H of this title] shall apply to taxable years ending after the date of the enactment of this Act [June 7, 2001] and to contributions made to electing Settlement Trusts for such year or any subsequent year.”