Tax Reform Implications for Alaska Native Corporations

February 2018

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Assignment of Payments

Village Corporations under ANCSA may now assign 7(j) payments to Alaska Native Settlement Trust (ANSTs) without recognizing these payments in gross income. Any assignment of these payments must be in writing, and the ANC may not have received such payment prior to the assignment. The ANST must include assigned payments in gross income when they are received. This is effective for tax years beginning after December 31, 2016.
 
Previous Restrictions
  • Payments made from the sharing of natural resource revenue were paid directly to the ANC, and tax at the corporate level. There was no mechanism to assign these payments to an ANST. 
Important Changes
  • Village Corporations may now assign 7(j) payments to ANST without recognizing these payments in gross income.
Benefits to You
  • Payments may be assigned to the ANST directly at a reduced tax rate. 


ANC and Settlement Trusts

ANC DEDUCTION FOR CONTRIBUTIONS TO ANST
ANCs may annually deduct contributions to ANST. If an ANC contributes cash to an ANST, then the ANC will receive a deduction equal to the amount of cash contributed to the ANC. If non-cash property is contributed then the ANC will receive a deduction equal to the lessor of its adjusted basis in the property or its fair market value. The ANC will not recognize gain or loss on such contributions. These deductions are limited to taxable income, and any excess may be carried forward for 15 years. Additionally, the ANC’s earnings and profits for the taxable year are reduced by the amount of any deduction.
 
Previous Restrictions
  • ANC contributions were not deductible to the corporation.
  • Contributions by ANC of appreciated property were taxable to the ANC.
Important Changes
  • ANCs may annually deduct contributions to ANST. 
  • If an ANC contributes cash to an ANST, then the ANC will receive a deduction equal to the amount of cash contributed to the ANC.
  • If non-cash property is contributed then the ANC will receive a deduction equal to the lessor of its adjusted basis in the property or its fair market value.
  • The ANC will not recognize gain or loss on such contributions.
  • These deductions are limited to taxable income, and any excess may be carried forward for 15 years.
  • ANC’s earnings and profits for the taxable year are reduced by the amount of any deduction.
Benefits to You
  • Contributions to a settlement trust will provide a permanent tax benefit to the ANC.
  • No corporate level tax for contributions to ANST.

ANST RECOGNITION OF INCOME FOR CONTRIBUTIONS FROM ANCs
ANSTs must recognize income in the amount equal to the deduction claimed by the ANC for contributions to the ANST.  The ANST will have a tax basis in non-cash property contributed by an ANC equal to the lessor of the tax basis held by the ANC or its fair market value at the time of contribution. ANSTs may also elect to defer the recognition of income of non-cash property until such property is sold. When the deferral election is made then the income that would have been recognized if the election were not made is to be taxed as ordinary income, and any excess will be treated in the same manner had the election not been made. 

For contributions where the election to defer income is made, such property may not be disposed or sold before the end of the first taxable year subsequent to the year of contribution. If this property is sold prior to this then the election is not valid. The ANST must pay tax attributable to the sale of such property, and a penalty of 10 percent on the tax assessed.
 
Important Changes
  • The ANST will have a tax basis in non-cash property contributed by an ANC equal to the lessor of the tax basis held by the ANC or its fair market value at the time of contribution.
  • ANSTs may elect to defer the recognition of income of non-cash property until such property is sold.
  • When the deferral election is made then the income that would have been recognized if the election were not made is to be taxed as ordinary income, and any excess will be treated in the same manner had the election not been made.
Benefits to You
  • ANST can receive appreciated property, and defer tax to future years. This will help get income generating assets into the ANST to benefit the shareholder beneficiaries.

ADMINISTRATIVE REQUIREMENTS
ANCs must provide to the ANST a statement describing 1) the total amount of contributions; 2) whether such property is cash; 3) whether such property is non-cash, the date acquired by the ANC, and the adjusted basis of the property; 4) the date each contribution was made to the ANST; and 5) any information deemed necessary by the Secretary to ensure accurate reporting of income on contributions.

Provisions related to ANC contributions and ANST income recognition is effective for tax years of the ANC for which the refund statute of limitations period has not expired. The provisions related to the administrative reporting requirements applies for tax years beginning after December 31, 2016. 

Important Changes
  • ANCs must provide to the ANST a statement describing 1) the total amount of contributions; 2) whether such property is cash; 3) whether such property is non-cash, the date acquired by the ANC, and the adjusted basis of the property; 4) the date each contribution was made to the ANST; and 5) any information deemed necessary by the Secretary to ensure accurate reporting of income on contributions.
  • Provisions related to ANC contributions and ANST income recognition is effective for tax years of the ANC for which the refund statute of limitations period has not expired.
  • The provisions related to the administrative reporting requirements applies for tax years beginning after December 31, 2016.