2003 HTML Instructions for Form 1120-SF,

This is archived information that pertains only to the 2003 Tax Year. If you
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Table of Contents

Purpose of Form

Use Form 1120-SF, U.S. Income Tax Return for Settlement Funds, to report transfers received, income earned, deductions claimed, distributions made, and to figure the income tax liability of a designated or qualified settlement fund.

Who Must File

All section 468B designated and qualified settlement funds must file an annual income tax return on Form 1120-SF.

When To File

Generally, a fund must file its income tax return by the 15th day of the 3rd month after the end of its tax year.

If the due date falls on a Saturday, Sunday, or legal holiday, the fund may file on the next business day.

Private delivery services. Funds can use certain private delivery services designated by the IRS to meet the “timely mailing as timely filing/paying” rule for tax returns and payments. The most recent list of designated private delivery services was published by the IRS in September 2002.

The list includes only the following:

Airborne Express (Airborne): Overnight Air Express Service, Next Afternoon Service, and Second Day Service.
DHL Worldwide Express (DHL): DHL “Same Day” Service, and DHL USA Overnight.
Federal Express (FedEx): FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2Day, FedEx International Priority, and FedEx International First.
United Parcel Service (UPS): UPS Next Day Air, UPS Next Day Air Saver, UPS 2nd Day Air, UPS 2nd Day Air A.M., UPS Worldwide Express Plus, and UPS Worldwide Express.

The private delivery service can tell you how to get written proof of the mailing date.

Extension. File Form 7004, Application for Automatic Extension of Time To File Corporation Income Tax Return, to request a 6-month extension of time to file.

Who Must Sign

The return must be signed and dated by the administrator of the fund.

If an employee of the fund completes Form 1120-SF, the paid preparer's space should remain blank. Anyone who prepares Form 1120-SF but does not charge the fund should not complete that section. Generally, anyone who is paid to prepare the return must sign it and fill in the “Paid Preparer's Use Only” area.

The paid preparer must complete the required preparer information and:

Sign the return in the space provided for the preparer's signature.
Give a copy of the return to the administrator.

Paid Preparer Authorization

If the fund wants to allow the IRS to discuss its tax return with the paid preparer who signed it, check the “Yes” box in the signature area of the return. This authorization applies only to the individual whose signature appears in the “Paid Preparer's Use Only” section of the fund's return. It does not apply to the firm, if any, shown in that section.

If the “Yes” box is checked, the fund is authorizing the IRS to call the paid preparer to answer any questions that may arise during the processing of its return. The fund is also authorizing the paid preparer to:

Give the IRS any information that is missing from the return,
Call the IRS for information about the processing of the return or the status of any related refund or payment(s), and
Respond to certain IRS notices that the fund has shared with the preparer about math errors, offsets, and return preparation. The notices will not be sent to the preparer.

The fund is not authorizing the paid preparer to receive any refund check, bind the fund to anything (including any additional tax liability), or otherwise represent the fund before the IRS. If the fund wants to expand the paid preparer's authorization, see Pub. 947, Practice Before the IRS and Power of Attorney.

The authorization cannot be revoked. However, the authorization will automatically end no later than the due date (excluding extensions) for filing the fund's tax return for the following year.

Assembling the Return

Attach schedules in alphabetical order and other forms in numerical order after Form 1120-SF.

Complete every applicable entry space on Form 1120-SF. Do not write “See Attached” instead of completing the entry spaces. If more space is needed on the forms or schedules, attach separate sheets using the same size and format as the printed forms. If there are supporting statements and attachments, arrange them in the same order as the schedules or forms they support and attach them last. Show the totals on the printed forms. Also, be sure to enter the fund's name and employer identification number (EIN) on each supporting statement or attachment.

Where To File

File the fund's return at the applicable IRS address listed below.

If the fund's principal business, office, or agency is located in:	And the total assets at the end of the tax year (Form 1120-SF, Schedule L, line 6, column (b)) are:	Use the following Internal Revenue Service Center address:
Connecticut, Delaware, District of Columbia, Illinois, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Vermont, Virginia, West Virginia, Wisconsin	Less than $10 million $10 million or more	Cincinnati, OH 45999-0012 Ogden, UT 84201-0012
Alabama, Alaska, Arizona, Arkansas, California, Colorado, Florida, Georgia, Hawaii, Idaho, Iowa, Kansas, Louisiana, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, Tennessee, Texas, Utah, Washington, Wyoming	Any amount	Ogden, UT 84201-0012
A foreign country or U.S. possession	Any amount	Philadelphia, PA 19255-0012

Tax Year and Accounting Method

A designated or qualified settlement fund's tax year is the calendar year and the fund must use the accrual method of accounting.

Rounding Off to Whole Dollars

The fund may round off cents to whole dollars on its return and schedules. If the fund does round to whole dollars, it must round all amounts. To round, drop amounts under 50 cents and increase amounts from 50 cents to 99 cents to the next dollar (for example, $1.39 becomes $1 and $2.50 becomes $3).

If two or more amounts must be added to figure the amount to enter on a line, include cents when adding the amounts and round off only the total.

Recordkeeping

Keep the fund's records for as long as they may be needed for the administration of any provision of the Internal Revenue Code. Usually, records that support an item of income, deduction, or credit on the return must be kept for 3 years from the date the return is due or filed, whichever is later. Keep records that verify the fund's basis in property for as long as they are needed to figure the basis of the original or replacement property.

The fund should keep copies of all filed returns. They help in preparing future and amended returns.

Depository Method of Tax Payment

The fund must pay the tax due in full no later than the 15th day of the 3rd month after the end of the tax year. The two methods of depositing fund income taxes are discussed below.

Electronic Deposit Requirement

The fund must make electronic deposits of all depository taxes (such as employment tax, excise tax, and fund income tax) after December 31 of the calendar year following any calendar year in which the fund deposited more than $200,000 of such taxes. Once the fund is required to use the Electronic Federal Tax Payment System (EFTPS), it must continue to use EFTPS in all later years.

If the fund is required to use EFTPS and fails to do so, it may be subject to a 10% penalty. If the fund is not required to use EFTPS, it may participate voluntarily. To enroll in or get more information about EFTPS, call 1-800-555-4477 or 1-800-945-8400. To enroll online, visit www.eftps.gov.

Depositing on time. For EFTPS deposits to be made timely, the fund must initiate the transaction at least 1 business day before the date the deposit is due.

Deposits With Form 8109

If the fund does not use EFTPS, deposit fund income tax payments (and estimated tax payments) with Form 8109, Federal Tax Deposit Coupon. If you do not have a preprinted Form 8109, use Form 8109-B to make deposits. You can get this form by calling 1-800-829-4933. Be sure to have your EIN ready when you call.

Do not send deposits directly to an IRS office; otherwise, the fund may have to pay a penalty. Mail or deliver the completed Form 8109 with the payment to an authorized depository (i.e., a commercial bank or other financial institution authorized to accept Federal tax deposits). Make checks or money orders payable to that depositary.

If the fund prefers, it may mail the coupon and payment to: Financial Agent, Federal Tax Deposit Processing, P.O. Box 970030, St. Louis, MO 63197. Make the check or money order payable to “Financial Agent.”

To help ensure proper crediting, write the fund's EIN, the tax period to which the deposit applies, and “Form 1120-SF” on the check or money order. Be sure to darken the “1120” box on the coupon. Records of these deposits will be sent to the IRS.

For more information on deposits, see the instructions in the coupon booklet (Form 8109) and Pub. 583, Starting a Business and Keeping Records.

If the fund owes tax when it files Form 1120-SF, do not include the payment with the tax return. Instead, mail or deliver the payment with Form 8109 to an authorized depositary, or use EFTPS, if applicable.

Estimated Tax Payments

Generally, the following rules apply to the fund's payments of estimated tax.

A fund must make installment payments of estimated tax if it expects its total tax for the year (less applicable credits) to be $500 or more.
The installments are due by the 15th day of the 4th, 6th, 9th, and 12th months of the tax year. If any date falls on a Saturday, Sunday, or legal holiday, the installment is due on the next business day.
Use Form 1120-W, Estimated Tax for Corporations, as a worksheet to compute estimated tax. The following instructions refer to the 2004 Form 1120-W. Enter expected modified gross income (see instructions for line 14 on page 4) on line 1 of Form 1120-W and skip lines 2 through 21 of Form 1120-W. Multiply estimated modified gross income by 35% and enter the result on line 22. Complete the rest of Form 1120-W in accordance with its instructions.
If the fund does not use EFTPS, use the deposit coupons (Forms 8109) to make deposits of estimated tax.

For more information on estimated tax payments, including penalties that apply if the fund fails to make required payments, see the instructions for line 17 on page 4.

Overpaid estimated tax. If the fund overpaid estimated tax, it may be able to get a quick refund by filing Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax. The overpayment must be at least 10% of the fund's expected income tax liability and at least $500. File Form 4466 after the end of the fund's tax year, and no later than the 15th day of the third month after the end of the tax year. Form 4466 must be filed before the fund files its tax return.

Interest and Penalties

Interest. Interest is charged on taxes paid late even if an extension of time to file is granted. Interest is also charged on penalties imposed for failure to file, negligence, fraud, substantial valuation misstatements, and substantial understatements of tax from the due date (including extensions) to the date of payment. The interest charge is figured at a rate determined under section 6621.

Penalty for late filing of return. A fund that does not file its tax return by the due date, including extensions, may be penalized 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. The minimum penalty for a return that is over 60 days late is the smaller of the tax due or $100. The penalty will not be imposed if the fund can show that the failure to file on time was due to reasonable cause. Funds that file late must attach a statement explaining the reasonable cause.

Penalty for late payment of tax. A fund that does not pay the tax when due generally may be penalized ½ of 1% of the unpaid tax for each month or part of a month the tax is not paid, up to a maximum of 25% of the unpaid tax. The penalty will not be imposed if the fund can show that the failure to pay on time was due to reasonable cause.

Trust fund recovery penalty. This penalty may apply if certain excise, income, social security, and Medicare taxes that must be collected or withheld are not collected or withheld, or these taxes are not paid. These taxes are generally reported on Forms 720, 941, or 945 (see Other Forms That May Be Required on page 3). The trust fund recovery penalty may be imposed on all persons who are determined by the IRS to have been responsible for collecting, accounting for, and paying over these taxes, and who acted willfully in not doing so. The penalty is equal to the unpaid trust fund tax. See the Instructions for Form 720 or Pub. 15 (Circular E), Employer's Tax Guide, for details, including the definition of responsible persons.

Other penalties. Other penalties can be imposed for negligence, substantial understatement of tax, and fraud. See sections 6662 and 6663.

Other Forms That May Be Required

The fund may have to file some of the following forms. See the form for more information.

Form W-2, Wage and Tax Statement, and Form W-3, Transmittal of Wage and Tax Statements. Use these forms to report wages, tips, and other compensation, and withheld income, social security, and Medicare taxes for employees.

Form 940 or Form 940-EZ, Employer's Annual Federal Unemployment (FUTA) Tax Return. The fund may be liable for FUTA tax and may have to file Form 940 or Form 940-EZ if it either:

Paid wages of $1,500 or more in any calendar quarter during the current calendar year or the preceding calendar year or
Had one or more employees who worked for the fund for at least some part of a day in any 20 or more different weeks during the preceding calendar year or 20 or more different weeks in the current calendar year.

Form 941, Employer's Quarterly Federal Tax Return. Employers must file this form quarterly to report income tax withheld, and employer and employee social security and Medicare taxes. Also see Trust fund recovery penalty on page 2.

Form 945, Annual Return of Withheld Federal Income Tax. File Form 945 to report income tax withheld from nonpayroll distributions or payments including pensions, annuities, IRAs, gambling winnings, and backup withholding. Also see Trust fund recovery penalty on page 2.

Form 1096, Annual Summary and Transmittal of U.S. Information Returns.

Forms 1099-DIV, INT, and MISC. These information returns are for reporting dividends and distributions, interest income, and miscellaneous income.

When reporting taxable distributions to claimants, use the appropriate information return to report the distribution. For example, if the distribution is for wages, report the distribution on Form W-2.

For more information, see the Instructions for Forms 1099, 1098, 5498, and W-2G, and Regulations section 1.468B-2(l).

Definitions

Administrator. An administrator, which may include a trustee if the designated or qualified settlement fund is a trust, is (in order of priority):

The person designated or approved by the governmental authority that ordered or approved the fund.
The person designated in the escrow agreement, settlement agreement, or other similar agreement governing the fund.
The escrow agent, custodian, or other person in possession of the fund's assets.
The transferor or, if there are multiple transferors, all of the transferors unless an agreement is signed by all of the transferors that designates a single transferor as the administrator.

Transferor. A transferor is a person who transfers (or on whose behalf an insurer or other person transfers) money or property to a settlement fund to resolve or satisfy claims against that person.

Related person. A related person is any person who is related to the transferor within the meaning of section 267(b) or section 707(b)(1).

Qualified Settlement Fund

A fund, account, or trust (“a fund”) is a qualified settlement fund if it meets the following requirements:

Governmental order or approval requirement.
Resolve or satisfy requirement.
Segregation requirement.

Governmental order or approval requirement. To meet this requirement, the fund must be ordered by, or approved by, the United States, any state (including the District of Columbia), territory, possession, or political subdivision thereof, or any agency or instrumentality (including a court of law) of any of the foregoing, and it must be subject to the continuing jurisdiction of that governmental authority.

A fund is ordered by or approved by a governmental authority when the authority issues its initial or preliminary order to establish, or grants its initial or preliminary approval of, the fund even if that order or approval may be subject to review or revision. Generally, a governmental authority's order or approval has no retroactive effect and does not permit a fund to be a qualified settlement fund prior to the date the order is issued or the approval is granted. However, see Relation-back rule below.

Arbitration panels. An arbitration award that orders the establishment of, or approves, a fund is an order or approval of a governmental authority if:

The arbitration award is judicially enforceable.
The arbitration award is issued following a bona fide arbitration proceeding in accordance with rules approved by a governmental authority (such as self-regulatory organization-administered arbitration proceedings in the securities industry).
The fund is subject to the continuing jurisdiction of the arbitration panel, the court of law that has jurisdiction to enforce the arbitration award, or the governmental authority that approved the rules of the arbitration proceedings.

Resolve or satisfy requirement. To meet this requirement, a fund must be established to resolve or satisfy one or more contested or uncontested claims that have resulted, or may result, from an event (or a series of related events) that has occurred and that has given rise to at least one claim asserting liability:

Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), as amended,
Arising out of a tort, breach of contract, or violation of law, or
Designated by the IRS in a revenue ruling or revenue procedure.

Generally, a fund does not meet the resolve or satisfy requirement if it is established to resolve or satisfy a liability to provide property or services unless the transferor's obligation to provide property or services is extinguished by a transfer or transfers to the fund. An exception exists for liabilities to provide property or services if the liabilities are under CERCLA.

Segregation requirement. To meet this requirement, the fund must (a) be a trust under applicable state law or (b) keep its assets segregated from other assets of the transferor (and related persons). For example, cash held by a transferor in a separate bank account satisfies the segregation requirement.

Classification of fund prior to meeting all three requirements. If a fund meets the resolve or satisfy requirement, the assets of the fund are treated as owned by the transferor of those assets until the fund also meets the governmental order and the segregation requirements. On the day the fund meets all three requirements, the transferor is treated as transferring the assets to a qualified settlement fund.

Relation-back rule. If a fund meets the resolve or satisfy requirement and the segregation requirement before it meets the governmental order or approval requirement, the transferor and the administrator (defined above) may jointly elect the relation-back election (defined below) to treat the fund as coming into existence as a qualified settlement fund on the later of (a) the date the fund meets the resolve or satisfy requirement and the segregation requirement or (b) January 1 of the calendar year in which all three requirements are satisfied.

If a relation-back election is made, the assets held by the fund on the date the qualified settlement fund is treated as coming into existence are treated as transferred to the qualified settlement fund on that date.

Relation-back election. Make the relation-back election by attaching a copy of the election statement to Form 1120-SF for the tax year in which the qualified settlement fund is treated as coming into existence. The statement must be signed by each transferor and the administrator. File Form 1120-SF and the election statement by the due date of Form 1120-SF, including extensions. The election statement must contain the following:

The words “Regulations section 1.468B-1 Relation-Back Election” at the top of the first page.
The name, address, and identifying number of each transferor.
The name, address, and EIN of the qualified settlement fund.
The date on which the qualified settlement fund is treated as coming into existence.
A schedule describing each asset treated as transferred to the fund on the date the fund is treated as coming into existence. The schedule of assets does not have to identify the amount of cash or the property transferred by a particular transferor.

Qualified settlement fund treated as a corporation. Except as otherwise provided in Regulations section 1.468B-5(b), for purposes of subtitle F of the Internal Revenue Code, a qualified settlement fund is treated as a corporation and any tax imposed under Regulations section 1.468B-2(a) is treated as a tax imposed by section 11. See Regulations section 1.468B-2(k) for more information.

Designated Settlement Fund

A fund, account, or trust is a designated settlement fund if it meets the following requirements:

It is established by a court order and completely extinguishes the taxpayer's tort liability.
No amounts may be transferred to it other than in the form of a qualified payment (defined below).
It must be administered by persons, a majority of whom are independent of the taxpayer.
It is established for the principal purpose of resolving and satisfying present and future claims against the taxpayer arising out of personal injury, death, or property.
The taxpayer may not hold any beneficial interest in the income or corpus of it.
The taxpayer elects to have it treated as a designated settlement fund.

A qualified payment is any money or property that is transferred to a designated settlement fund under a court order other than:

Any amount that may be transferred from the fund to the taxpayer (or any related person).
The transfer of any stock or indebtedness of the taxpayer (or any related person).

Note.

A designated settlement fund is taxed in the same manner as a qualified settlement fund. In addition, if a fund does not meet the requirements of a designated settlement fund but does meet the requirements of a qualified settlement fund, the fund is treated as a qualified settlement fund.

General Instructions