Settlement Trust disposition increase is a tax, not a penalty

Plain-English summary

Chief Counsel addressed an Alaska Native Settlement Trust election under Section 247(g). It concluded that the additional 10 percent due when contributed property is disposed of is a tax, not a penalty, despite legislative history using the word penalty. The statutory language treats the amount as an increase in tax, and disposing of the property is not unlawful conduct being punished. Counsel also explained that the requirement to identify contributed property with reasonable particularity depends on the type of property. Section 6039H(e)(2), Section 170, and the related regulations can guide the information required, but the description must be detailed enough for the IRS to distinguish the transferred property from other property.

Ruling snapshot

• Question: Is the 10 percent increase under Section 247(g) a tax or penalty, and how specifically must an electing trust identify contributed property?
• Outcome: Advice given; the increase is a tax, and reasonable particularity requires enough detail to identify the transferred property based on its type.
• Key authorities: IRC §§ 170, 247(g), and 6039H(e)(2); National Federation of Independent Business v. Sebelius

Full text (IRS public release)

ID: CCA_2018041407055550
UILC: 247.04-00

Number: 201822026
Release Date: 6/1/2018
From:
Sent: Saturday, April 14, 2018 7:05:55 AM
To:

Cc:
Bcc:
Subject: 247(g)

Please find the following responses to the questions asked below:

Is the 10 percent a tax or a separate penalty with an interest component?

The 10% increase applicable to a disposition of property that had been contributed to an
Alaska Native Settlement Trust and subject to the election under I.R.C. § 247(g) is a
tax.

As with any case of statutory construction, we first examine the language of the statute
itself. The dependent clause in § 247(g)(3)(C)(i)(III) “and increased by 10 percent of the
amount of such increase” plainly refers back to the independent clause “the Settlement
Trust shall pay any increase in tax resulting from such inclusion.” Since the
independent clause refers to an “increase in tax,” we conclude that the dependent
clause means the increase is the tax, including any applicable interest.

It is important to note that the legislative history of this provision refers to the additional
10 percent amount as a penalty. We think, however, that the language of the statute,
which governs, is better read to interpret this amount as tax.

Even if the plain language analysis is unsatisfactory because the statute can be seen as
ambiguous, we believe that Supreme Court precedent supports the view that the 10
percent increase in § 247(g)(3)(C)(i)(III) is a tax and not a penalty. In National
Federation of Independent Business v. Sebelius (NFIB), the Court reasoned that, “if the
concept of penalty means anything, it means punishment for an unlawful act or
omission.” In NFIB, the Court found, “[w]hile the individual mandate clearly aims to
induce the purchase of health insurance, it need not be read to declare that failing to do
so is unlawful.”

Section 247(g)(3)(C)(i)(III) can be read as imposing an incentive to keep the contributed
property within the Settlement Trust. Disposing of property contributed to the
Settlement Trust is not illegal and the increase is not a penalty for unlawful
behavior. The 10 percent increase here is more an incentive and less a punishment for
unlawful conduct. Accordingly, we conclude that the 10% increase applicable to a
disposition of property that had been contributed to an Alaska Native Settlement Trust
and subject to the election under I.R.C. § 247(g) is a tax.

What information must an electing trust provide to meet the statutory
requirements (i.e., what is the definition of “reasonable particularity”)?

We have determined “reasonable particularity” can be informed by the language found
in § 6039H(e)(2).

(e) Deductible contributions by Native Corporations to Alaska Native Settlement Trusts
(2) Content of statement The statement described in paragraph (1) shall
include—
(A) the total amount of contributions to which the election under
subsection (e) of section 247 applies,
(B) for each contribution, whether such contribution was in cash,
(C) for each contribution which consists of property other than cash, the
date that such property was acquired by the Native Corporation and the
adjusted basis and fair market value of such property on the date such
property was contributed to the Settlement Trust,
(D) the date on which each contribution was made to the Settlement
Trust, and
(E) such information as the Secretary determines to be necessary or
appropriate for the identification of each contribution and the accurate
inclusion of income relating to such contributions by the Settlement
Trust. Since (E) is based on specific facts and circumstances of each
contribution, the property must be described in such detail that allows the
Service to distinguish the property described from other property not
contributed or separately contributed.

In addition to looking at the section 6039H factors outlined above, section 170 and the
regulations thereunder may also provide insight to what additional information should be
requested under (E), in light of the property contributed (e.g., requirements for land,
motor vehicles, boats, taxidermy, etc). We do not believe it is possible to specifically
define “reasonable particularity” for all cases. Rather, what constitutes reasonable
particularity will depend on the type of property. In general, the description of the
property should be specific enough that we can identify the property that was
transferred.

Please let us know if you have any further questions about the topics above.