A bill to amend the Internal Revenue Code of 1986 to clarify the tax treatment of Settlement Trusts established pursuant to the Alaska Native Claims Settlement Act

Summary: Amends the Internal Revenue Code with respect to the tax treatment of Settlement Trusts established under the Alaska Native Claims Settlement Act. 
Exempts from income taxation any such Settlement Trust electing coverage by this Act.  Declares that for an electing trust: (1) no amount shall be includible in the gross income of a Settlement Trust beneficiary by reason of a contribution to the Settlement Trust during such taxable year; and (2) the ordinary requirements for taxation of trusts and beneficiaries shall not apply. 
Requires an electing trust to distribute at least 55 percent of its adjusted taxable income each taxable year.  Imposes a tax on a trust, in the amount of the failure, if the distribution is insufficient. 
Includes in the beneficiary's gross income, as ordinary income, any distribution from an electing trust (only when the actual distribution is received).  Provides that distributions from the trust will be taxable as ordinary income even if the distribution represents a return of capital.  Requires tax withholding on trust distributions over a certain amount.

SECTION 1. TAX TREATMENT OF ALASKA NATIVE SETTLEMENT TRUSTS.

    (a) Tax Exemption.--Section 501(c) of the Internal Revenue Code of 
1986 is amended by adding at the end the following new paragraph:
            ``(28) A trust which--
                    ``(A) constitutes a Settlement Trust under section 
                39 of the Alaska Native Claims Settlement Act (43 
                U.S.C. 1629e), and
                    ``(B) with respect to which an election under 
                subsection (p)(2) is in effect.''
    (b) Special Rules Relating to Taxation of Alaska Native Settlement 
Trusts.--Section 501 of the Internal Revenue Code of 1986 is amended by 
redesignating subsection (p) as subsection (q) and by inserting after 
subsection (o) the following new subsection:
    ``(p) Special Rules for Taxation of Alaska Native Settlement 
Trusts.--
            ``(1) In general.--For purposes of this title, the 
        following rules shall apply in the case of a Settlement Trust:
                    ``(A) Electing trust.--If an election under 
                paragraph (2) is in effect for any taxable year--
                            ``(i) no amount shall be includible in the 
                        gross income of a beneficiary of the Settlement 
                        Trust by reason of a contribution to the 
                        Settlement Trust made during such taxable year, 
                        and
                            ``(ii) except as provided in this 
                        subsection, the provisions of subchapter J and 
                        section 1(e) shall not apply to the Settlement 
                        Trust and its beneficiaries for such taxable 
                        year.
                    ``(B) Nonelecting trust.--If an election is not in 
                effect under paragraph (2) for any taxable year, the 
                provisions of subchapter J and section 1(e) shall apply 
                to the Settlement Trust and its beneficiaries for such 
                taxable year.
            ``(2) One-time election.--
                    ``(A) In general.--A Settlement Trust may elect to 
                have the provisions of this subsection and subsection 
                (c)(28) apply to the trust and its beneficiaries.
                    ``(B) Time and method of election.--An election 
                under subparagraph (A) shall be made--
                            ``(i) before the due date (including 
                        extensions) for filing the Settlement Trust's 
                        return of tax for the 1st taxable year of the 
                        Settlement Trust ending after the date of the 
                        enactment of this subsection, and
                            ``(ii) by attaching to such return of tax a 
                        statement specifically providing for such 
                        election.
                    ``(C) Period election in effect.--Except as 
                provided in paragraph (3), an election under 
                subparagraph (A)--
                            ``(i) shall apply to the 1st taxable year 
                        described in subparagraph (B)(i) and all 
                        subsequent taxable years, and
                            ``(ii) may not be revoked once it is made.
            ``(3) Special rules where transfer restrictions modified.--
                    ``(A) Transfer of beneficial interests.--If, at any 
                time, a beneficial interest in a Settlement Trust may 
                be disposed of 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 the interest were Settlement 
                Common Stock--
                            ``(i) no election may be made under 
                        paragraph (2)(A) with respect to such trust, 
                        and
                            ``(ii) if an election under paragraph 
                        (2)(A) is in effect as of such time--
                                    ``(I) such election is revoked as 
                                of the 1st day of the taxable year 
                                following the taxable year in which 
                                such disposition is first permitted, 
                                and
                                    ``(II) there is hereby imposed on 
                                such trust a tax equal to the product 
                                of the fair market value of the assets 
                                held by the trust as of the close of 
                                the taxable year in which such 
                                disposition is first permitted and the 
                                highest rate of tax under section 1(e) 
                                for such taxable year.
                The tax imposed by clause (ii)(II) shall be in lieu of 
                any other tax imposed by this chapter for the taxable 
                year.
                    ``(B) Stock in corporation.--If--
                            ``(i) the Settlement Common Stock in any 
                        Native Corporation which transferred assets to 
                        a Settlement Trust making an election under 
                        paragraph (2)(A) may be disposed of in a manner 
                        not permitted by section 7(h) of the Alaska 
                        Native Claims Settlement Act (43 U.S.C. 
                        1606(h)), and
                            ``(ii) at any time after such disposition 
                        of stock is first permitted, such corporation 
                        transfers assets to such trust,
                clause (ii) of subparagraph (A) shall be applied to 
                such trust on and after the date of the transfer in the 
                same manner as if the trust permitted dispositions of 
                beneficial interests in the trust in a manner not 
                permitted by such section 7(h).
                    ``(C) Administrative provisions.--For purposes of 
                subtitle F, any tax imposed by subparagraph (A)(ii)(II) 
                shall be treated as an excise tax with respect to which 
                the deficiency procedures of such subtitle apply.
            ``(4) Distribution requirement on electing settlement 
        trust.--
                    ``(A) In general.--If an election is in effect 
                under paragraph (2) for any taxable year, a Settlement 
                Trust shall distribute at least 55 percent of its 
                adjusted taxable income for such taxable year.
                    ``(B) Tax imposed if insufficient distribution.--If 
                a Settlement Trust fails to meet the distribution 
                requirement of subparagraph (A) for any taxable year, 
                then, notwithstanding subsection (c)(28), a tax shall 
                be imposed on the trust under section 1(e) on an amount 
                of taxable income equal to the amount of such failure.
                    ``(C) Designation of distribution.--Solely for 
                purposes of meeting the requirements of this paragraph, 
                a Settlement Trust may elect to treat any distribution 
                (or portion) during the 65-day period following the 
                close of any taxable year as made on the last day of 
                such taxable year. Any such distribution (or portion) 
                may not be taken into account under this paragraph for 
                any other taxable year.
                    ``(D) Adjusted taxable income.--For purposes of 
                this paragraph, the term `adjusted taxable income' 
                means taxable income determined under section 641(b) 
                without regard to any deduction under section 651 or 
                661.
            ``(5) Tax treatment of distributions to beneficiaries.--
                    ``(A) Electing trust.--If an election is in effect 
                under paragraph (2) for any taxable year, any 
                distribution to a beneficiary shall be included in 
                gross income of the beneficiary as ordinary income.
                    ``(B) Nonelecting trusts.--Any distribution to a 
                beneficiary from a Settlement Trust not described in 
subparagraph (A) shall be includible in income as provided under 
subchapter J.
            ``(6) Definitions.--For purposes of this subsection--
                    ``(A) 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)).
                    ``(B) Settlement trust.--The term `Settlement 
                Trust' means a trust which constitutes a Settlement 
                Trust under section 39 of the Alaska Native Claims 
                Settlement Act (43 U.S.C. 1629e).''
    (c) Withholding on Distributions by Electing ANCSA Settlement 
Trusts.--Section 3402 of the Internal Revenue Code of 1986 is amended 
by adding at the end the following new subsection:
    ``(t) Tax Withholding on Distributions by Electing ANCSA Settlement 
Trusts.--
            ``(1) In general.--Any Settlement Trust (as defined in 
        section 501(p)(6)(B)) which is exempt from income tax under 
        section 501(c)(28) (in this subsection referred to as an 
        `electing trust') and which makes a payment to any beneficiary 
        shall deduct and withhold from such payment a tax in an amount 
        equal to such payment's proportionate share of the annualized 
        tax.
            ``(2) Exception.--The tax imposed by paragraph (1) shall 
        not apply to any payment to the extent that such payment, when 
        annualized, does not exceed an amount equal to the amount in 
        effect under section 6012(a)(1)(A)(i) for taxable years 
        beginning in the calendar year in which the payment is made.
            ``(3) Annualized tax.--For purposes of paragraph (1), the 
        term `annualized tax' means, with respect to any payment, the 
        amount of tax which would be imposed by section 1(c) 
        (determined without regard to any rate of tax in excess of 31 
        percent) on an amount of taxable income equal to the excess 
        of--
                    ``(A) the annualized amount of such payment, over
                    ``(B) the amount determined under paragraph (2).
            ``(4) Annualization.--For purposes of this subsection, 
        amounts shall be annualized in the manner prescribed by the 
        Secretary.
            ``(5) No application to third party payments.--This 
        subsection shall not apply in the case of a payment made, 
        pursuant to the written terms of the trust agreement governing 
        an electing trust, directly to third parties to provide 
        educational, funeral, or medical benefits.
            ``(6) Alternate withholding procedures.--At the election of 
        an electing trust, the tax imposed by this subsection on any 
        payment made by such trust shall be determined in accordance 
        with such tables or computational procedures as may be 
        specified in regulations prescribed by the Secretary (in lieu 
        of in accordance with paragraphs (2) and (3)).
            ``(7) Coordination with other sections.--For purposes of 
        this chapter and so much of subtitle F as relates to this 
        chapter, payments which are subject to withholding under this 
        subsection shall be treated as if they were wages paid by an 
        employer to an employee.''
    (d) Reporting.--Section 6041 of the Internal Revenue Code of 1986 
is amended by adding at the end the following new subsection:
    ``(f) Application to Alaska Native Settlement Trusts.--In the case 
of any distribution from a Settlement Trust (as defined in section 
501(p)(6)(B)) to a beneficiary, this section shall apply, except that--
            ``(1) this section shall apply to such distribution without 
        regard to the amount thereof,
            ``(2) the Settlement Trust shall include on any return or 
        statement required by this section information as to the 
        character of such distribution (if applicable) and the amount 
        of tax imposed by chapter 1 which has been deducted and 
        withheld from such distribution, and
            ``(3) the filing of any return or statement required by 
        this section shall satisfy any requirement to file any other 
        form or schedule under this title with respect to distributive 
        share information (including any form or schedule to be 
        included with the trust's tax return).''
    (e) Effective Date.--The amendments made by this section shall 
apply to taxable years of Settlement Trusts ending after the date of 
the enactment of this Act and to contributions to such trusts after 
such date.