Can an electing Alaska Native Settlement Trust deduct its beneficiary distributions on its Colorado return, and must it withhold Colorado tax on distributions to nonresident beneficiaries from renting a Colorado building?

Plain-English summary

This ruling involves an Alaska Native Settlement Trust — a special irrevocable trust that an Alaska Native Corporation may create under the Alaska Native Claims Settlement Act (ANCSA) to hold and invest settlement funds for its shareholders. The trust's only Colorado activity is renting out one commercial building under a long-term triple-net lease. It asked Colorado two questions, and got "no" to both — each "no" actually favorable and internally consistent.

1. Can the trust deduct its beneficiary distributions on its Colorado return? No. Ordinarily a trust can deduct amounts distributed to beneficiaries under IRC § 661, with the beneficiaries then picking up that income. But a Settlement Trust may elect out of the § 661 deduction under IRC § 646 — becoming an "electing Settlement Trust" that is taxed at the trust level and whose distributions are excluded from beneficiaries' income. This trust made that § 646 election in 2002. Colorado income tax starts from federal taxable income (§ 39-22-104(1.7)(c); IRC § 63). Because the trust took no § 661 deduction federally, there is none to carry into the Colorado calculation — the trust pays Colorado tax at the entity level.

2. Must the trust withhold Colorado tax on distributions to nonresident beneficiaries? No. Colorado normally makes a fiduciary withhold on a nonresident beneficiary's share of Colorado-source income from in-state real property (§ 39-22-601(4)). But IRC § 646(e) excludes an electing Settlement Trust's distributions from the beneficiary's gross income. With the distributions excluded, the beneficiaries have no Colorado-source income from the trust's building, so there is nothing to withhold on.

The two answers fit together: the trade-off of electing out of the distribution deduction is that the tax is paid once, at the trust level, and the beneficiaries are left out of the income picture entirely — including for Colorado withholding.

What this means for you

Alaska Native Corporations and their Settlement Trusts

If your Settlement Trust made the IRC § 646 election, expect to be taxed by Colorado at the trust level on its Colorado income (here, the building rental), with no distribution deduction. The flip side is real relief on compliance: distributions are excluded from beneficiaries' income, so you don't withhold Colorado tax on nonresident beneficiaries for that income.

Fiduciaries and trustees generally

The mechanism is worth remembering even outside ANCSA: Colorado piggybacks on federal taxable income, so a federal election (here, electing out of § 661) carries straight through to the state return. And the duty to withhold on nonresident beneficiaries depends on whether they actually have Colorado-source income — if a federal rule excludes the distribution from their gross income, the withholding duty falls away.

Accountants and tax professionals

Watch the chain: § 39-22-104(1.7)(c) → IRC § 63 → IRC § 646(g)/§ 641(b) (electing Settlement Trust taxed without the § 651/§ 661 deduction) for Issue 1; and § 39-22-601(4) withholding, defeated by IRC § 646(e)'s exclusion of distributions from beneficiary gross income, for Issue 2. The election was made in 2002 on the first Form 1041-N.

Common questions

Q: Can an electing Settlement Trust deduct distributions to beneficiaries on its Colorado return?
A: No. Having elected out of the IRC § 661 deduction federally under IRC § 646, it has no such deduction federally, and Colorado starts from federal taxable income — so the trust is taxed on that income at the entity level.

Q: Does the trust withhold Colorado tax on nonresident beneficiaries?
A: No. IRC § 646(e) excludes the trust's distributions from beneficiaries' gross income, so the beneficiaries have no Colorado-source income and there's nothing to withhold.

Q: Why are both answers "no," and is that bad for the trust?
A: They're two sides of the same election. The trust gives up the distribution deduction (so it pays the tax itself), but in exchange the beneficiaries are out of the income picture — including for Colorado withholding.

Q: What is an Alaska Native Settlement Trust?
A: An irrevocable trust authorized by ANCSA (43 U.S.C. § 1629e) that an Alaska Native Corporation may create to hold and invest settlement funds and land for its shareholders.

Q: Can other trusts rely on this ruling?
A: No. A private letter ruling binds the Department only for the taxpayer and facts it was issued to and cannot be relied on by anyone else.

Citations and references

Statutes and rules:
- § 39-22-104(1.7)(c), C.R.S. (Colorado tax on federal taxable income of individuals, estates, trusts)
- § 39-22-601(4), C.R.S. (fiduciary withholding for nonresident beneficiaries); § 39-22-109(1) (apportionment for nonresidents)
- 26 U.S.C. § 63 (federal taxable income); §§ 641, 646, 651, 661, 662 (trust taxation; electing Settlement Trust; § 646(e) exclusion of distributions)
- 43 U.S.C. § 1601 et seq.; § 1629e (ANCSA; Settlement Trusts)
- 1 CCR 201-1, Rule 24-35-103.5 (private letter ruling procedure)

Related Colorado income-tax ruling: [[plr-26-002-receipts-for-income-apportionment]].

Source

• Landing page: Colorado Letter Rulings
• Original PDF: PLR-25-006.pdf

Original ruling text

Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]

PLR 25-006
November 25, 2025
XXXXXXXXX
XXXXXXXXX
XXXXXXXXX
XXXXXXXXX
Via Electronic Mail: XXXXXXXXX
Re: Electing Settlement Trust’s Taxable Income and Withholding of Distributions
Dear XXXXXXXXX:
You submitted a request for a private letter ruling on behalf of XXXXXXXXX (“Taxpayer”), to the Colorado
Department of Revenue (“Department”) pursuant to 1 CCR 201-1, Rule 24-35-103.5. This letter is the
Department’s private letter ruling. This ruling is binding on the Department to the extent set forth in 1 CCR
201-1, Rule 24-35-103.5. It cannot be relied upon by any taxpayer other than the taxpayer to whom the
ruling is made.
Issues
1. Whether Taxpayer may take into account the deduction allowed by section 661(a) of the Internal
Revenue Code in computing its Colorado income tax.
2. Whether Taxpayer is required to withhold from the income to be distributed to any nonresident
beneficiaries insofar as the beneficiaries’ share of net income from the rental of its building in
Colorado.
Conclusions
1. Taxpayer may not take the section 661(a) deduction into account in computing its Colorado
income tax.
2. Taxpayer is not required to withhold tax on nonresident beneficiaries’ distributive shares of net
income from the rental of its building in Colorado.
Background1
Taxpayer is established as an Alaska Native Settlement Trust, a special type of irrevocable trust
authorized by the federal Alaska Native Claims Settlement Act of 1971 (ANCSA). 2 The main purpose of
1 Paragraph (4)(b)(ii) of 1 CCR 201-1, Rule 24-35-103.5 requires the request for a private letter ruling to include a statement of

facts. This section generally recites the statement of facts provided in the initial request or in any supplement or amendment
thereto, which is not an indication that the Department found such facts relevant to its analysis. Some relevant facts may be
redacted or omitted to ensure confidentiality as required by section 24-35-103.5(5), C.R.S. The terms used in this section to
describe the factual background are generally those of the requester.
2 43 U.S.C. § 1601 et seq.

PLR 25-006
November 25, 2025
Page 2
Taxpayer is to generate business income through strategic portfolio investments and maintenance of
other business assets, resulting in distribution payments from trust income to its direct beneficiaries. The
beneficiaries are all shareholders of an urban Alaska Native Corporation headquartered and administered
in its home state of Alaska.
Taxpayer’s business activity in Colorado is limited to the rental of a commercial building it owns in the
state. The property is under a long-term triple net lease with a single tenant. Taxpayer does not have
employees nor employ subcontractors in Colorado and does not regularly or methodically have personnel
travel to Colorado to perform any duties related to its property.
ANCSA is remedial Indian legislation enacted by the United States Congress pursuant to its plenary
authority under the Commerce Clause of the United States Constitution. ANCSA required local Alaska
Native groups to incorporate in order to receive the land and settlement funds specified in ANCSA.
Because these Alaska Native Corporations did not always meet the practical needs of Alaska Natives,
Congress enacted Section 39 of ANCSA (43 U.S.C. sec.1629(e)) to authorize Alaska Native Corporations
to create “Alaska Native Settlement Trusts” as an alternate vehicle to hold and invest ANCSA settlement
funds and to hold ANCSA land in perpetuity. The formation of these Settlement Trusts is exclusively
allowed to Alaska Native Corporations.
Section 641(a) of the Internal Revenue Code generally imposes tax on a trust’s taxable income. However,
section 661 provides that amounts to be distributed may be deducted in computing a trust’s taxable
income. Additionally, section 662 requires that amounts deducted pursuant to section 661 shall generally
be added to beneficiaries’ gross incomes.
However, section 646 permits any Settlement Trust to elect out of the deduction allowed by section 661.
Taxpayer made its section 646 election in 2002 with the filing of its first Form 1041-N, known as the U.S.
Income Tax Return for Electing Alaska Native Settlement Trusts. This same form is filed annually to
report all items of income and deduction and to compute and pay federal income tax.
Discussion
Colorado imposes a tax on the federal taxable income “of every individual, estate, and trust” subject to
certain limitations, additions, and subtractions. 3 For the purposes of Colorado income tax, federal taxable
income is “determined pursuant to section 63 of the internal revenue code . . . .”4 Section 63 of the
Internal Revenue Code defines taxable income as “gross income minus the deductions allowed by
[Chapter 1 of the IRC] . . . .”5 Generally, section 661 allows that amounts distributed to trust beneficiaries
may be deducted in computing a trust’s taxable income. 6 Additionally, section 662 requires that amounts
deducted by the trust pursuant to section 661 shall generally be added to beneficiaries’ gross incomes. 7
Taxpayer may not take the section 661(a) deduction into account in computing its Colorado
income tax.
Taxpayer is established as a Settlement Trust pursuant to 43 U.S.C. sec 1629e. A Settlement Trust
differs from other trusts in that section 646 of the Internal Revenue Code permits any Settlement Trust to
elect out of the deduction allowed by section 661—becoming thereby an “electing Settlement Trust.”8
Section 646(g) provides that “the taxable income of an electing Settlement Trust shall be determined
3 Section 39-22-104(1.7)(c), C.R.S.
4 Id.
5 26 U.S.C. sec. 63(a).
6 26 U.S.C. sec. 661(a).
7 26 U.S.C. sec. 662(a).
8 26 U.S.C. sec. 646(a), sec. 646(c)(1), sec 646(g), and sec. 646(h)(1).

PLR 25-006
November 25, 2025
Page 3
under section 641(b) without regard to any deduction under section 651 or 661.” 9
Taxpayer elected out of the deduction allowed by section 661 with the filing of its first Form 1041-N in
2002. It became, at that point, an electing Settlement Trust. As an electing Settlement Trust, Taxpayer’s
distributions to beneficiaries are not deducted from its federal taxable income. Consequently, Taxpayer
may not take the section 661(a) deduction into account in computing its Colorado income tax—which
must be filed at the trust entity level.10
Taxpayer is not required to withhold tax on beneficiaries’ distributive shares of net income from
the rental of Taxpayer’s building in Colorado.
Generally, to facilitate the collection and payment of the tax, Colorado law requires fiduciaries of estates
and trusts with a nonresident beneficiary which receives net income from real or tangible personal
property within Colorado to withhold tax upon the beneficiary’s share of said income.11 The tax imposed
upon nonresident individuals is apportioned in the ratio of Colorado nonresident federal adjusted gross
income to total federal adjusted gross income.12 However, section 646(e) of the Internal Revenue Code
generally provides that amounts distributed by an electing Settlement Trust are excludable from a
beneficiary’s gross income.13 Because amounts distributed by Taxpayer are excludable from
beneficiaries’ gross income, beneficiaries will have no Colorado-sourced income with respect to
Taxpayer’s income from its property in Colorado. Therefore, Taxpayer is not required to withhold from the
income to be distributed to any nonresident beneficiaries insofar as the beneficiaries’ share of net income
from the rental of its building in Colorado.
Miscellaneous
This ruling is premised on the assumption that Taxpayer has completely and accurately disclosed all
material facts, that all representations are true and complete, and that Taxpayer has otherwise complied
with the requirements of section 24-35-103.5, C.R.S., and the rules promulgated pursuant thereto. The
Department reserves the right, among others, to independently evaluate Taxpayer’s facts,
representations, and assumptions. The ruling is null and void if any such fact, representation, or
assumption is incorrect and has a material bearing on the conclusions reached in this ruling. This ruling is
binding on the Department, and is subject to modification or revocation, in accordance with 1 CCR 201-1,
Rule 24-35-103.5.
Thank you for your request.
Sincerely,
Office of Tax Policy
Colorado Department of Revenue
This ruling cannot be relied upon by any other taxpayer other than the taxpayer to whom the
ruling is made.

9 26 U.S.C. sec. 646(g). Section 641(b) provides that “[the] taxable income of an estate or trust shall be computed in the same

manner as in the case of an individual . . .[and] shall be computed on such taxable income and shall be paid by the fiduciary.” 26
U.S.C. 641(b).
10 See section 39-22-104(1.7)(c), C.R.S.
11 Section 39-22-601(4), C.R.S.
12 Section 39-22-109(1), C.R.S.
13 26 USC sec. 646(e).