however, is that Shaan-Seet, again like most Native corporations, must devote substantial resources each year in attempting to minimize its earnings and profits and in order to reduce taxation on our shareholders. This is expensive, time consuming, and distracts Shaan-Seet from what should be its real focus, developing profitable businesses.

ANCSA was (and is) Indian settlement legislation. The Alaska Natives received land and cash through their corporations in exchange for the settlement of their land claims against the United States. Most other modern day Indian settlement acts* have provisions which significantly reduce or eliminate the tax impact from the settlement. The drafters of ANCSA recognized this, and provisions were included which would reduce and/or eliminate taxation relative to the ANCSA settlements.

However, ANCSA as drafted did not go far enough. ANCSA required Alaska Natives to incorporate to receive the ANCSA settlement, and Alaska Natives had no choice in the matter. As you know, Mr. Chairman, the corporate form carries with it a high potential tax cost in terms of double taxation (once to the corporation, once to the shareholders) and the possibility that distributions will nonetheless be taxable even though the corporation might have no profit. Had the corporate form not been employed, these anomalies would not be present. Shaan-Seet believes that it is a matter of fundamental fairness to reduce, to the greatest extent possible, these anomalies so that the original ANCSA settlement is not indirectly made taxable through a tax on distributions.

With this in mind, Mr. Chairman, Shaan-Seet declares its support for a provision such as that outlined in the Description of Miscellaneous Tax Proposals so that ANCSA distributions would not be taxable until such time as a certain minimum amount has been distributed.

Taxation on Contributions to Settlement Trusts. The ANCSA Amendments of 1987, amended ANCSA to permit Native Corporations to establish "Settlement Trusts” as an

See, e.g.. Maine Indian Claims Settlement Act of 1980, codified at 25 U.S.C. § 1729; the Rhode Island Indian Claims Settlement Act, codified at 25 U.S.C. § 1716; and the Connecticut Indian Claims Settlement Act, codified at 25 U.S.C. § 1754.

5 Section 21 of ANCSA, codified at 43 U.S.C. § 1620.

6 Pub. L. No. 100-241, 101 Stat. 1788 (1988).

alternate vehicle to provide benefits for that Native Corporation's shareholders. As envisioned by the ANCSA Amendments, the Native Corporation would transfer assets directly to the Settlement Trust, and the Settlement Trust would thereafter provide benefits to the shareholders. One of the important driving forces behind the Settlement Trust provisions was that it would permit the shareholders to receive benefits' through the trust that they might not have been legally able to receive through the corporate form. Importantly, the enabling legislation permits Settlement Trusts to last for a very long period of time, without regard to the rule against perpetuities, thereby enabling a Native corporation to use a Settlement Trust to provide for future generations of shareholders.

Unfortunately in a series of rulings' the IRS has repeatedly taken the position that transfers by a Native corporation into a settlement provide an indirect current benefit to the Native corporation's shareholders even though no cash is currently distributed. The result is the worst of all tax nightmares: possible "phantom" income. Put differently, the IRS ruling posture means that a distribution to the shareholders is being made at the time of the contribution to the trust. Leaving aside the horrendous effect of a phantom distribution of this sort, this problem is even more complex in that the IRS takes the position that the amount of the phantom income is to be determined based on all the events and circumstances which surround the beneficial interests in the trust. Thus, not only is the phantom income a problem, but it is not possible to say with any certain what the current economic value is for a given transfer into a settlement trust.

The result has been to leave transfers into settlement trusts in a somewhat uncertain area, especially for those corporations which have been highly successful and

7 E.g., educational benefits. This is because educational benefits would not necessarily be actually provided to all corporate shareholders on a pro rata basis, thereby potentially violating the rule that all corporate shareholders must be treated equally.

8 Section 39(b)(4), codified at 43 U.S.C. § 1629e(b)(4).

9 Private Letter Ruling (PLR) 9516023 (January 17, 1995); PLR 9516022 (January 17, 1995); PLR 9502011 (September 29, 1994); PLR 943302 (May 19, 1994); PLR 9329026 (April 28, 1993); and PLR 9326019 (March 31, 1993). The IRS has also issued three other PLRS involving the same settlement trust, but these PLRS did not reach the deemed distribution issue: PLR 8947054 (November 24, 1989), as modified by PLR 9119037 (February 8, 1991) and PLR 9452019 (September 28, 1994).

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. Our proposed language is as follows:

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.