land claims. As contemplated in the provisions which enacted Settlement Trusts, their purpose was not to conduct an active trade or business, but was to provide a secure holding for lands and investments that can be protected for generations to come.

The proposed amendment recognizes the differences that arise in implementing the intent of ANSCA with the Internal Revenue Code (IRC). The amendment provides that the mere transfer of funds to the Settlement Trust will not give rise to any current taxation at the shareholder's last beneficiary level. Under current law, it is possible that distributions or monies set aside in a Settlement Trust could be currently taxable to the shareholders. This would create a situation in which a tax liability existed without any funds being provided to the individual liable for the tax. We believe this result was not intended when Congress enacted the Settlement Trust provisions in 1987. Currently, some Native corporations have the ability of transferring funds to Settlement Trusts without incurring any current tax liability. This is due to the fact that these companies have a deficit in their earnings and profits. Other companies, however, are prohibited from making such a transfer for the benefit of their shareholders because they have an accumulation of earnings and profits already. The enactment of the Settlement Trust provisions was not intended to discriminate against companies that have done what ANSCA envisioned that they should do and generate some economic benefit (earnings) from their lands and other assets for their Native shareholders.

There is a fundamental inequity and deficiency currently as the law is being carried out. As it is now, if Native land entitlement is monetized and the proceeds placed in a Settlement Trust and that corporation had earnings and profits, there would be an immediate tax liability created for each shareholder of the corporation. The effect of this is to severely devalue the lands (and its cash equivalent) which were used in settlement by the people of the United States of aboriginal Native claims. Aside from the patent unfairness of such a result, it was not the intent of the Congress in ANSCA nor in amendments to the Act. This issue has become more relevant and important as more Native corporations, including our own, have begun to look (or have seriously looked) at the Settlement Trust as an option for helping to provide some modest long-term economic benefit to Native Shareholders.

The intent of the amendment is to allow the transfer to a Settlement Trust not to be treated as emanating from the earnings and profits of the corporation. Without this provision, a substantial portion of the assets of a Native Village Corporation will be taxed twice before it has ever generated any income whatsoever for its shareholders: once when it is taxed on any gain realized while the asset was in the corporation and again when these assets are transferred to the Settlement Trust. In addition to the unfairness of such a result and its nature of undermining the goals of ANCSA, if not corrected, the problem addressed by the amendment will continue to frustrate the establishment of and reliance on settlement trusts. Many companies simply will not be able to afford the decrease in corporate/trust assets on a combined basis by creating a tax liability to their shareholders. Accordingly, many Settlement Trusts that could be established for the benefit of current and future generations will not materialize or will not be augmented unless there is some remedy to this flaw in the Settlement Trust is corrected.

It does not appear that there will be any adverse revenue impact from this provision since among other reasons, without the provision successful Native companies will be severely restricted from establishing Settlement Trusts and many will simply never be created. While if such Trusts are established there will be a tax revenue stream generated in perpetuity including the ancillary state and local tax benefit generated by such a permanent fund. In fact, our analysis indicates that with adoption of the amendment the tax revenues over time, will generate federal, state and local tax revenues in excess of those generated if the Settlement Trusts were not created and the funds simply distributed, which is a likely alternative to establishing a Settlement Trust.

In addition to the pending amendment, we urge that language be included which would recognize the reporting difficulties associated with the establishment of Settlement Trusts.

While simple in principle, the actual mechanics of providing the information and reporting in a timely manner to beneficiaries of the Settlement Trust become very complicated.

This complication is further aggravated by the fact that the majority of beneficiaries have had relatively low income levels. Accordingly, their tax returns and their filings have been relatively straightforward. The establishment of Settlement Trusts and the taxation of distributions to these individuals creates a need for timely information, reporting and direction. Additionally, many of the shareholders of Village Corporations in the coastal communities make a living from commercial fishing. As a result they have the ability of avoiding estimated tax payment penalties, providing they file their tax returns by March 1. This, again, creates a very short time frame to file a complete and accurate Trust tax return and distribute information Forms K-1 to a substantial base of beneficiaries. This base can exceed 500 or 1,000 and beyond beneficiaries, depending on the size of a village corporation and the number of such corporations who may establish Settlement Trusts under the law. A regional corporation could well be in excess of 5,000 shareholders/beneficiaries who would be receiving information Forms K-1.

Currently, Section 645 of the IRC provides that trusts must be on a calendar year. By allowing an earlier year-end. Settlement Trusts will be permitted to distribute important tax reporting information to the beneficiaries early and allow for additional time in order to ensure that the beneficiaries have adequate information and assistance in filing correct and complete income tax returns. In this way, the government is assisted by an attempt to avoid reporting discrepancies which can arise when the information is rushed due to year-end time constraints. The revenue impact of this provision should be a positive one since it will enhance the ability of the individual and the government to ensure that reporting is accurate and all taxes are reported and paid in a timely manner. Some income may remain in the Trust for inflationproofing and to recognize an expanding base of beneficiaries. This net retainage would be subject to tax at the Trust level. A deferral on the recognition of this income of up to three months would provide for a benefit to the Trust only to the extent that the tax on the income in the stub period exceeded the estimated payment responsibilities of the Trust. Since the Trust will not conduct an active trade or business, its investment income is anticipated to be relatively even throughout the year. Accordingly, any deferral should not give rise to a major savings or difference between the taxes due on the income and the estimated taxes required.

Settlement Trusts provide a unique opportunity for Native corporations to help carry out the Congressional intent of ANSCA, by providing a firm and continuing economic base for shareholders/beneficiaries and avoiding one-time distributions to the shareholder community which would deplete the combined corporate/trust funds. Settlement Trusts have a potential of providing a much needed step in achieving continued economic independence for the Native community. The proposed amendment is necessary to encourage the establishment of these Trusts and to perform this function.

The language of the remedial provision submitted to the Committee by Chairman Don Young would cure most of the current deficiency in the settlement trust provision in ANCSA. As indicated earlier, OHNC and AKI urge that a reporting provision be added to enhance the ability of any Settlement Trust that is created to get information to beneficiaries of the Trust prior to the time tax returns are due. This provision, for many of the beneficiaries who live in remote locations in Alaska and many of whom live close to the poverty line, will greatly enhance the ability of the individuals to accurately report any dividend from such Trust, and thereby help ensure full accounting and reporting in a timely manner.

We understand that there are other Alaska Native corporations which are supportive of this Settlement Trust amendment pending before the Committee.

We believe that there may be a better or more appropriate way to correct the problem in the current law. Both OHNC and AKI would look forward to the opportunity to discuss with representatives of the Committee the amendment and ideas about how it might be improved.

Thank you for this opportunity to present comments to the Committee on the amendment

to the Alaska Native Claims Settlement Act regarding Settlement Trusts.

We urge your support of House Resolution 757 as an effective method for collecting delinquent tax debts owed the states. The Federation of Tax Administrators estimates that the states would initially collect as much as $200 million from the federal offset program, and slightly less in succeeding years. The Joint Committee on Taxation also estimates that an additional $9 million in federal revenues would be collected from the offset of state tax refunds in the states that do not currently participate in the IRS offset program.

I strongly encourage your support of this significant legislation. The State of Missouri has for many years, voluntarily and without remuneration, provided debt offset services for the Internal Revenue Service. A reciprocal program would help the Missouri Department of Revenue collect delinquent taxes due the state. If you have any questions about House Resolution 757 or the federal debt offset program, please feel free to contact me.

We are writing to provide you testimony upon two of the miscellaneous tax proposals for which public hearings were held on July 11-13, 1995'. Although we understand that at the present time oral testimony on these proposals has not been scheduled, we would welcome the chance to testify in person should that opportunity become available. In making this submission, it is our intent that this material be included in the written record of the hearing.

Shaan-Seet, Incorporated is the corporation organized under the Alaska Native Claims Settlement Act2 for the Alaska natives residing in the Craig, Alaska area. Craig is located on the west side of Prince of Wales Island, which in turn is approximately 100 miles west of Ketchikan, Alaska. There were originally 317 enrollees to Shaan-Seet; in 1993 Congress directed that two more persons be enrolled to Shaan-Seet for a total of 319 enrollees. In view of various transfers of its stock over the years, Shaan-Seet now has approximately 400 shareholders.

1 These proposals were described in the pamphlet issued by the Joint Committee on Taxation, Description of Miscellaneous Tax Proposals (JCS-19-95), July 10, 1995. For simplicity, we refer to this in the text simply as the "Description of Miscellaneous Tax Proposals".

seq.

2 Pub. L. No. 92-203, 85 Stat. 688 (December 18, 1971), codified at 43 U.S.C. § 1601 et

P. O. Box 90 Craig, Alaska 99921-0090 907-826-3251 Fax 907-826-3980

Shaan-Seet is keenly interested in the both of the Alaska Native proposals set forth at pages 44-46 of the Description of Miscellaneous Tax Proposals. It is for this reason that we today submit this testimony. The remaining portions of this letter refer to the proposal on regular ANCSA distributions as "Taxation of ANCSA Distributions" and the proposal relative to Settlement Trusts as "Taxation on Contributions to Settlement Trusts".

Taxation of ANCSA Distributions. One of the principle purposes of the ANCSA legislation was to provide for "the real economic and social needs of Natives" through the establishment of profit-making corporations. Like most Native corporations, ShaanSeet makes every effort to provide significant economic assistance to its shareholders through regular distributions. The source for these distributions is the cash Shaan-Seet derives from its timber harvest operations. At present, taxation of these distributions is determined by the rules contained in § 301 of the Internal Revenue Code. That is, the distributions are taxable to the extent of current and accumulated earnings and profits; thereafter, further distributions are treated as a return of capital (and hence tax free) to the extent of a given shareholder's basis. Once the shareholder's basis is exceeded, any remaining distributions would be taxable as a capital gain item.

Although we can state these rules relatively simply, their actual application can be extraordinarily complex. This is particularly so given the fact that most ANCSA corporations (including Shaan-Seet) have received their ANCSA lands at various times, and may have a variety of different tax bases in their timber. This in turn may lead to considerably different tax impacts on our shareholders depending on which timber is cut at what times. Also, it is not unusual for Native corporations to eliminate their own taxable income (through carry over NOLs) but nonetheless to be paying taxable distributions (because NOLS do not enter into the calculation of current year earnings and profits).

As you can imagine, many of our shareholders are elderly or unemployed, and the tax impact on them can be substantial even in the lower marginal rate brackets. There is a very real concern, therefore, to minimize the tax impact on our distributions. The result,

3 Section 2(b) of ANCSA, codified at 43 U.S.C. § 1601(b).