Page 435 - Small Business IRS Training Guides

Audit Considerations

The primary compliance issue with respect to these provisions is that, other than by inspecting the relevant income tax

returns, it is not possible to match the exclusion of income or deduction claimed by the Native Corporation with the
corresponding income inclusions by the Settlement Trust. Because of the relationship between the Native Corporation

and the Settlement Trust, an examiner auditing one entity will have to review the tax return of (or expand the examination
to include) the other entity to ensure consistent tax treatment of the income assignment or contributions.

In effect, the provisions allow a Native Corporation to reduce or eliminate its taxable income by assigning eligible income

to a Settlement Trust or by taking a tax deduction for cash and non-cash property contributed to a Settlement Trust.
Examiners auditing a Native Corporation should inquire whether the corporation assigned income to a Settlement Trust

or contributed property to a Settlement Trust for which the Native Corporation elected to deduct the value of the
contributed property.

If the Native Corporation assigned income to a Settlement Trust, the examiner should confirm the corporation assigned
qualified income, verity the assignment was in writing to an electing § 646 Settlement Trust, and review the income tax

return of the Settlement Trust to determine whether the trust reported the assigned income.

If the Native Corporation elected to deduct contributions of property to the Settlement Trust, the examiner should verify
the corporation correctly computed its basis in any non-cash property contributed to the Settlement Trust and provided the

Settlement Trust with the statement required under § 6039H(e). The examiner also should review the trust return to
determine whether the Settlement Trust reported the contribution as income, or in the case of a contribution of non-cash

property, elected to defer the recognition of income.

The taxability of distributions from a § 646 Settlement Trust depend upon the earnings and profits of the Native

Corporation. Therefore, where there are examination changes that affect the earnings and profits of the corporation the

examiner must review the tax return of the § 646 Settlement Trust to determine the tax effect, if any, on the beneficiaries
who received distributions from the trust.

73233-102 13821-6 Tax Cuts and Jobs Act