26 U.S.C. § 646 — Tax treatment of electing Alaska Native

Page 1828 TITLE 26—INTERNAL REVENUE CODE § 646 1 See References in Text note below. this section [enacting this section and amending sec- tion 2652 of this title] shall apply with respect to es- tates of decedents dying after the date of the enact- ment of this Act [Aug. 5, 1997].’’ § 646. Tax treatment of electing Alaska Native Settlement Trusts (a) In general If an election under this section is in effect with respect to any Settlement Trust, the provi- sions 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) Taxation of income of trust Except as provided in subsection (f)(1)(B)(ii)— (1) In general There is hereby imposed on the taxable in- come of an electing Settlement Trust, other than its net capital gain, a tax at the lowest rate specified in section 1(c).1 (2) Capital gain 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 speci- fied in section 1(c). Any such tax shall be in lieu of the income tax otherwise imposed by this chapter on such in- come or gain. (c) One-time election (1) In general A Settlement Trust may elect to have the provisions of this section apply to the trust and its beneficiaries. (2) Time and method of election An election under paragraph (1) shall be made by the trustee of such trust— (A) on or before the due date (including ex- tensions) for filing the Settlement Trust’s return of tax for the first taxable year of such trust ending after the date of the enact- ment of this section, and (B) by attaching to such return of tax a statement specifically providing for such election. (3) Period election in effect Except as provided in subsection (f), an elec- tion under this subsection— (A) shall apply to the first taxable year de- scribed in paragraph (2)(A) and all subse- quent taxable years, and (B) may not be revoked once it is made. (d) Contributions to trust (1) Beneficiaries of electing trust not taxed on contributions In the case of an electing Settlement Trust, no amount shall be includible in the gross in- come of a beneficiary of such trust by reason of a contribution to such trust. (2) Earnings and profits The earnings and profits of the sponsoring Native Corporation shall not be reduced on ac- count of any contribution to such Settlement Trust. (e) Tax treatment of distributions to bene- ficiaries Amounts distributed by an electing Settle- ment Trust during any taxable year shall be considered as having the following characteris- tics 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 tax- able 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 de- scribed in paragraph (1) for all taxable years for which an election is in effect under sub- section (c) with respect to the trust, and not previously taken into account under para- graph (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 re- cipient beneficiary as amounts described in section 301(c)(1), to the extent of current or ac- cumulated earnings and profits of the spon- soring Native Corporation as of the close of such taxable year after proper adjustment is made for all distributions made by the spon- soring 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. Amounts distributed to which paragraph (3) ap- plies shall not be treated as a corporate dis- tribution subject to section 311(b), and for pur- poses of determining the amount of a distribu- tion for purposes of paragraph (3) and the basis to the recipients, section 643(e) and not section 301(b) or (d) shall apply. (f) Special rules where transfer restrictions modified (1) Transfer of beneficial interests 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 sub- section (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 ad- Page 1829 TITLE 26—INTERNAL REVENUE CODE § 651 justment is made for all distributions made by the sponsoring Native Corpora- tion during such taxable year. In no event shall the increase under clause (iii) exceed the fair market value of the trust’s assets as of the date the beneficial interest of the trust first becomes so disposable. The earnings and profits of the sponsoring Native Corporation shall be adjusted as of the last day of such taxable year by the amount of earnings and profits so included in the distrib- utable net income of the trust. (2) Stock in corporation If— (A) stock in the sponsoring Native Cor- poration may be disposed of to a person in a manner which would not be permitted by section 7(h) of the Alaska Native Claims Set- tlement 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, paragraph (1)(B) shall be applied to such trust on and after the date of the transfer in the same manner as if the trust permitted disposi- tions of beneficial interests in the trust in a manner not permitted by such section 7(h). (3) Certain distributions For purposes of this section, the surrender of an interest in a Native Corporation or an electing Settlement Trust in order to accom- plish 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 corpora- tion or trust, shall be deemed to be a transfer permitted by section 7(h) of the Alaska Native Claims Settlement Act. (g) Taxable income For purposes of this title, the taxable income of an electing Settlement Trust shall be deter- mined under section 641(b) without regard to any deduction under section 651 or 661. (h) Definitions For purposes of this section— (1) Electing Settlement Trust The term ‘‘electing Settlement Trust’’ means a Settlement Trust which has made the election, effective for a taxable year, described in subsection (c). (2) Native Corporation 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) Settlement Common Stock 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) Settlement Trust The term ‘‘Settlement Trust’’ means a trust that constitutes a settlement trust under sec- tion 3(t) of the Alaska Native Claims Settle- ment Act (43 U.S.C. 1602(t)). (5) Sponsoring Native Corporation The term ‘‘sponsoring Native Corporation’’ means the Native Corporation which transfers assets to an electing Settlement Trust. (i) Special loss disallowance rule 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 ad- justment 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) Cross reference For information required with respect to electing Settlement Trusts and sponsoring Native Corpora- tions, see section 6039H. (Added Pub. L. 107–16, title VI, § 671(a), June 7, 2001, 115 Stat. 144.) 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 cor- responding 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 sec- tion [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 con- tributions made to electing Settlement Trusts for such year or any subsequent year.’’ SUBPART B—TRUSTS WHICH DISTRIBUTE CURRENT INCOME ONLY Sec. 651. Deduction for trusts distributing current in- come only. 652. Inclusion of amounts in gross income of bene- ficiaries of trusts distributing current in- come only. § 651. Deduction for trusts distributing current income only (a) Deduction In the case of any trust the terms of which— (1) provide that all of its income is required to be distributed currently, and (2) do not provide that any amounts are to be paid, permanently set aside, or used for the purposes specified in section 642(c) (relating to deduction for charitable, etc., purposes), there shall be allowed as a deduction in com- puting the taxable income of the trust the