Page 429 - Small Business IRS Training Guides

Prior Tax Law

The Alaska Native Claims Settlement Act (ANCSA) established Native Corporations to hold property for Alaska Natives.

Alaska Natives are generally the only permitted common shareholders of those corporations unless a Native Corporation
specifically allows other shareholders under specified procedures. ANCSA permits a Native Corporation to transfer money

or other property to an Alaska Native Settlement Trust (Settlement Trust) for the benefit of beneficiaries who constitute all
or a class of the shareholders of the Native Corporation, to promote the health, education and welfare of beneficiaries and

to preserve the heritage and culture of Alaska Natives.

Native Corporations and Settlement Trusts, as well as their shareholders and beneficiaries, are generally subject to
tax under the same rules and in the same manner as other taxpayers that are corporations, trusts, shareholders, or

beneficiaries. Payments received by a Native Corporation for the sharing of revenues generated by natural resources are
includable in the gross income of the corporation and subject to the corporate income tax. Contributions of appreciated

property by a Native Corporation to a Settlement Trust are taxable to the Native Corporation.

Internal Revenue Code § 646 allows a Settlement Trust to elect to use a more favorable tax regime for transfers of

property received from a Native Corporation. A Settlement Trust makes this election by filing Form 1041-N, U.S. Income

Tax Return for Electing Alaska Native Settlement Trusts. This election also includes reporting to beneficiaries, as
described in § 6039H. An electing Settlement Trust pays tax on its taxable income at the lowest rate specified for
individuals (rather than the higher rates that are generally applicable to trusts) and pays tax on capital gains at a rate

consistent with being subject to such lowest rate of tax.

A distribution from an electing Settlement Trust is excludable from the gross income of beneficiaries to the extent of the
taxable income of the Settlement Trust for the taxable year and all prior taxable years for which an election was in effect,

decreased by income tax paid by the Trust, and increased by tax-exempt interest from State and local bonds for the same
period. Distributions that exceed the excludable amount are taxed to the beneficiaries as if distributed by the sponsoring

Native Corporation in the year of distribution by the trust, which means that the beneficiaries must include in gross income
as dividends the amount of the distribution, up to the current and accumulated earnings and profits of the Native

Corporation. Distributions that exceed the current and accumulated earnings and profits are not included in gross income

by the beneficiaries.

73233-102 13821-3 Tax Cuts and Jobs Act