The Kentucky Revenue Cabinet respectfully submits the following written comments to the House Committee on Ways and Means to express support for the inclusion of H.R. 757 in the next tax bill enacted by Congress:

Currently, Kentucky and 30 other states and the District of Columbia offset state income tax refunds to satisfy federal income tax debts. The program generates roughly $61 million for the federal treasury. In Kentucky alone, the program resulted in $402,266 of federal tax collections in 1993. H.R. 757 represents bipartisan legislation to establish a program to offset federal income tax refunds to satisfy legally enforceable past due state tax debts. Enactment of H.R. 757 would be extremely beneficial to the Commonwealth of Kentucky and to states generally.

The federal government lacks the statutory authority to offset federal tax refunds to satisfy delinquent state debts. H.R. 757 would provide such authority. Such legislation could increase state revenues by $150-$200 million per year for the first few years, until the inventory of delinquent debts is reduced, and at a lesser amount in subsequent years, according to estimates by the Federation of State Administrators. Approximately $3 million of this amount would benefit Kentucky. The program should also increase federal revenues, according to the Joint Committee on Taxation, because all states with income taxes would be expected to participate in the program for offsetting state refunds to meet federal tax obligations.

The proposed legislation would allow the Secretary of the Treasury to establish an offset program for legally enforceable past due state tax obligations similar to that established for debts due other federal agencies. State tax debts would not be satisfied from an offset until all federal tax debts, both types of past due child support, and debts due other federal agencies were satisfied. As with other federal agencies, states would be required to notify taxpayers of the obligation and that such debt will be referred to the IRS for offset if not satisfied in 60 days. The Secretary would be authorized to charge the states for the offset. The proposed legislation would also amend IRC § 6103 to permit the disclosure of information regarding the offset to state agencies when necessary.

closing services are facing substantial litigation costs in the absence of language clarifying the intention of Sec. 6045(e)(3).

Though clarification of I.R.C. Sec. 6045(e)(3) regarding the separate charge was agreed to by Congress as Sec. 7616 of the Conference Report on HR 11, the "Revenue Act of 1992," President Bush vetoed the bill. Therefore, the industry is still, to this day, facing litigation costs and is finding it necessary to establish that while 6045(e) (3) prohibits separate charges for 1099-S filings, it does not prohibit combined charges or other means of recovering compliance costs.

With the exception of Sec. 6045(e) (3), we are unaware of any additional instances where private parties believe they have authority to enforce the Internal Revenue Code. We hope that the Committee considers that the current litigation is obviously financially burdensome, and that proliferation of this type of action on a national level, covering the 5 to 7 million annual real estate transactions would present a financially devastating picture. For our industries, this litigation is one precedent-setting instance which supports the need for repeal.

Real estate reporting persons are subject to penalties under Secs. 6721-24 for inaccurate reporting of information to the IRS. As a result of the uniform statutory reforms to the civil penalty system in 1989, the IRS submits 1099-S filers to the same automated regimes for penalties applicable to other information return filers. This penalty regime is applicable even though the 1099-S filer usually has limited contact with the taxpayer in question. A taxpayer may well give a 1099-S filer a social security number that does not match to IRS files. The 1099-S filer thus faces two levels of cost at two separate times. First, the filer must complete and transmit the original 1099-S form. Second, several years later the filer must respond to IRS inquires and penalties for a mismatched taxpayer identification number. In the meantime, has the IRS actually used very many of even just the 1099-S forms filed that had no matching errors to determine whether those taxpayers properly reported the transactions? There is no evidence that such is the case.

These penalties are set at $50.00 per incorrect filing. The penalties imposed by the IRS can be substantial for companies who perform a significant number of closings in the United States, annually approaching several hundred thousand dollars. These companies also have to face the possibility that (1) some individuals may have provided them with incorrect TINS, and (2) there may be some margin of clerical error inherent in the volume of transactions filed.

This assumption that there may be some incorrect TINS, is compounded by the predicament that there is no continuing customer relationship between a closing agent and a seller of real estate. Consequently, our companies often face the dilemma that it may be cheaper to pay a fine to the IRS, as opposed to committing staff time to retrieve warehoused files and attempt to track down the seller of a property to check a TIN.

We believe that the Congress should require substantial evidence to justify retaining tax information return requirements which, standing alone, contribute minimally to a tax determination. The major example of this is Form 1099-S. It would seem that some alternative means to the current statutory system could be found to alert taxpayers to the importance of reporting their own real estate transactions and removing the burdens on filers for information that is, at best, of marginal use to the government.

We would be pleased to work with the Committee to arrive at such a different system.

ARCTIC SLOPE REGIONAL CORPORATION

Arctic Slope Regional Corporation ("ASRC") appreciates the opportunity to present this statement for the record pertaining to hearings on miscellaneous tax proposals.

ASRC is the Native Corporation established by the Inupiat Eskimo people of Alaska's North Slope pursuant to the Alaska Native Claims Settlement Act of 1971 ("ANCSA"). ASRC, along with 12 other regional corporations and numerous village corporations created by ANCSA, received title to land and a monetary compensation as settlement for the taking of Native Lands. The corporations were given a mandate to use those lands and money to promote the economic and social betterment of over 7,000 shareholders.

Specifically, ASRC wishes to comment on, and indicate its strong support for, the proposal to provide for taxation of Alaska Natives when payments from Settlement Trusts are actually made to them and not when such Settlement Trusts are created.

ANCSA provided that the corporate vehicle would be the primary entity to implement the goal of settling land and other claims of Alaska Natives. Subsequently, it was determined that other Native-controlled entities might provide increased flexibility and protections to preserve and appropriately disburse the Native assets. Accordingly, the 1987 amendments to ANCSA provided for the establishment of Settlement Trusts "to promote the health, education and welfare of its beneficiaries and preserve the heritage and culture of Natives". By statute, the Settlement Trust cannot operate as a business. While the original transfer of land and cash to Alaska Native Corporations was specified as a non-taxable event under ANCSA, the Settlement Trust provision is silent on the tax treatment of the conveyance of assets to Settlement Trusts.

This opportunity, created by the U.S. Congress, has been effectively thwarted by adverse Internal Revenue Service ("IRS") rulings. The IRS has ruled that if a Native Corporation, which has earnings and profits, conveys assets to a Settlement Trust, its shareholder-beneficiaries will be taxed as if they received a dividend. The IRS rulings require payment of a tax by the shareholder-beneficiaries before (usually several years before) they have actually received a distribution from the Settlement Trust. Put simply, in our case, the IRS is requiring Alaska Natives, with very few resources, to put up money in the form of prepaid tax payments, in order to receive monthly amounts of $125 to help them live in retirement. In reality, Alaska Natives would have to put up several thousand dollars to qualify for the payments and, if they die prematurely, or do not survive through their life expectancy, will never recover even the tax payments they have made.

Attached are case studies compiled to demonstrate the patent unfairness of this position. These case studies are representative of the elders of ASRC. For example, in Case A, if a trust is created this year and a male 62 years of age is a beneficiary, using the assumptions set forth in the paper, he would have to prepay taxes, in 1995, in the amount of $5,094, even though he would not begin to receive benefits until 1998 (when he is 65). It would take him until the year 2001 to recover his prepaid taxes and actually receive a benefit from the fund. And, to indicate how punitive the application of this theory is, if he dies in 1997, he will not have received a cent, yet paid $5,094 in taxes.

We are not rich people. It is conceivable that many potential beneficiaries would have to waive such benefits because they cannot raise the funds necessary to prepay the taxes. This is certainly not the result Congress intended when it passed the Settlement Trust amendments.

Accordingly, we are suggest a simple legislative cure: provide for taxation of the Alaska Natives when trust payments are actually made to them and not when the Settlement Trust is created. There is no revenue loss since this is only a question of the timing of the taxation. proposed language is as follows:

Our

Section 39 of the Alaska Natives Claims Settlement Act (43 U.S.C. §1629 (e)) is amended to add the following new paragraph:

(d) A holder of Settlement Common Stock who is a beneficiary of a Settlement Trust created under this section shall not be subject to taxation with respect to assets conveyed to a Settlement Trust or any income earned by a Settlement Trust until a distribution of assets or income is actually received by such beneficiary.

The above provision would clarify that a Native Corporation's shareholders are not subject to tax under any theory (such as that the shareholders received or constructively received a dividend or a taxable economic benefit) until they have actually received a distribution from the Settlement Trust. The provision's treatment of shareholder tax liability would not adversely affect IRS rulings holding that, with regard to the Native Corporation, the conveyance of assets to the trust is a non-taxable event except for the conveyance of appreciated property and that Settlement Trust grantors will not be treated as owners of Settlement Trusts under Section 675 of the Internal Revenue code if their powers are appropriately limited.

ASRC would like the opportunity to create an Elder's Trust under the protections that the 1987 amendments provide. The burden on our elder shareholders under the current law would be impossible to bear. The Inupiat culture emphasizes the importance of our elders to our future and their contributions to our past. We would like to provide to them a small measure of financial security which was not provided for in their subsistence lifestyle. In conclusion, we hope this committee will see fit to rectify this problem which impacts so negatively on our esteemed elders.

PRACTICAL APPLICATION OF THE INTERNAL REVENUE SERVICE'S
Settlement TRUST RULINGS TO RETIREES

Listed below are four hypothetical illustrations of the tax effect of the Internal Revenue Service's ruling that beneficiaries of a non-grantor trust are immediately liable for taxes on the actuarial estimate of benefits they might receive. These illustrations are based on the following assumptions:

A non-grantor version of an Elders Trust, receiving the
full benefits and protections of the Settlement Trust
provision of the Alaska Native Claims Settlement Act,
is created in 1995 that provides the same benefits and
eligibility criteria as a grantor trust (not having
such benefits and protections) that was in fact created
by an Alaska Native Corporation.

The actuarial benefit is calculated using standard life expectancy tables, based on a 1986 DHHS study, which is the most widely accepted table in use in the insurance industry today.

The marginal tax rate is 28%.

The discount rate is 5.0%, a number within a reasonable range of the likely return available to a shareholder on a relatively safe, long-term investment.

The computer printouts supporting the four case studies are attached.

The four illustrations reflect the actuarial benefit of the Elders Trust to a male and female at ages 62 and 65 at the time the trust is funded. These case studies are representative of the beneficiaries of the trust at that age. In this Elders Trust, shareholders become eligible for benefits at age 65, but must reach age 65 by 1998. The benefits are $125 per month in the first year of eligibility and increase by 4% a year thereafter.

Case A. Case A concerns a hypothetical male who is age 62 when the trust is created in 1995. He would not become eligible for benefits until 1998. Nonetheless, he would receive an actuarially estimated benefit of $18,000 and pay taxes on that amount of $5,094 in 1995. It would take him until the year 2001 (or seven years) to receive a benefit (in present value terms) equal to the taxes he paid in 1995.

Case B. Case B is the same as Case A except the assumed beneficiary is female. Her life expectancy is longer and thus her actuarial benefit is larger. Her taxes would be $6,333 in 1995 and it would take her until 2002 to recover her taxes.

Case C. Case C is a male, age 65 at the time the program is created. His taxes would be $6,261 in 1995 and it would take him until 1999 to recover his taxes.

Case D. Case D is a female, age 65 at the time the program is created. Her taxes would be $7,682 in 1995 and it would take her until the year 2000 to recover her taxes.

Shareholders who outlive their projected life expectancy will ultimately receive more in the way of benefits than the amount on which they paid taxes. It will take many years, however, for the balance to shift in their favor. In the meantime, these shareholders, most of whom can ill-afford the required taxes, would be forced to advance thousands of dollars to the government in the hope of living long enough to recoup them.