Bankruptcy Estate

The bankruptcy trustee or debtor-in- possession must file Form 1041 for the estate of an individual involved in bankruptcy proceedings under chapter 7 or 11 of title 11 of the United States Code if the estate has gross income for the tax year of $6,925 or more. See Of Special Interest To Bankruptcy Trustees and Debtors-in-Possession on page 10 for details.

Common Trust Funds

Do not file Form 1041 for a common trust fund maintained by a bank. Instead, the fund may use Form 1065, U.S. Return of Partnership Income, for its return. For more details, see section 584 and Regulations section 1.6032-1.

Qualified Settlement Funds

The trustee of a designated or qualified settlement fund must file Form 1120-SF, U.S. Income Tax Return for Settlement Funds, rather than Form 1041.

Special Filing Instructions for Grantor Type Trusts, Pooled Income Funds, and Electing Small Business Trusts

Grantor Type Trusts

A trust is a grantor trust if the grantor retains certain powers or ownership benefits. This can also apply to only a portion of a trust. See Grantor Type Trust on page 11 for details on what makes a trust a grantor trust.

In general, a grantor trust is ignored for tax purposes and all of the income, deductions, etc., are treated as belonging directly to the grantor. This also applies to any portion of a trust that is treated as a grantor trust.

The following instructions apply only to grantor type trusts that are not using an optional filing method.

File Form 1041 for a grantor trust unless you use an optional filing method.

If the entire trust is a grantor trust, fill in only the entity portion of Form 1041. Do not show any dollar amounts on the form, itself; show dollar amounts only on an attachment to the form. Do not use Schedule K-1 (Form 1041) as the attachment.

If only part of the trust is treated as a grantor trust, report on Form 1041 only the part of the income, deductions, etc., that is taxable to the trust. The amounts that are taxable directly to the grantor are shown only on an attachment to the form. Do not use Schedule K-1 (Form 1041) as the attachment.

On the attachment, report:

• The name, identifying number, and address of the person(s) to whom the income is taxable;
• The income of the trust that is taxable to the grantor or another person under sections 671 through 678. Report the income in the same detail as it would be reported on the grantor's return had it been received directly by the grantor; and
• Any deductions or credits that apply to this income. Report these deductions and credits in the same detail as they would be reported on the grantor's return had they been received directly by the grantor.

The income taxable to the grantor or another person under sections 671 through 678 and the deductions and credits that apply to that income must be reported by that person on their own income tax return.

Example.   The John Doe Trust is a grantor type trust. During the year, the trust sold 100 shares of ABC stock for $1,010 in which it had a basis of $10 and 200 shares of XYZ stock for $10 in which it had a $1,020 basis.

The trust does not report these transactions on Form 1041. Instead, a schedule is attached to the Form 1041 showing each stock transaction separately and in the same detail as John Doe (grantor and owner) will need to report these transactions on his Schedule D (Form 1040). The trust may not net the capital gains and losses, nor may it issue John Doe a Schedule K-1 (Form 1041) showing a $10 long-term capital loss.

Optional Filing Methods for Certain Grantor Type Trusts

Generally, if a trust is treated as owned by one grantor or other person, the trustee may choose Optional Method 1 or Optional Method 2 as the trust's method of reporting instead of filing Form 1041.

Generally, if a trust is treated as owned by two or more grantors or other persons, the trustee may choose Optional Method 3 as the trust's method of reporting instead of filing Form 1041.

Once you choose the trust's filing method, you must follow the rules under Changing filing methods if you want to change to another method.

Exceptions.   The following trusts cannot report using the optional filing methods:

1. A common trust fund (as defined in section 584(a)).
2. A foreign trust or a trust that has any of its assets located outside the United States.
3. A qualified subchapter S trust (as defined in section 1361(d)(3)).
4. A trust all of which is treated as owned by one grantor or one other person whose tax year is other than a calendar year.
5. A trust all of which is treated as owned by one or more grantors or other persons, one of which is not a U.S. person.
6. A trust all of which is treated as owned by one or more grantors or other persons if at least one grantor or other person is an exempt recipient for information reporting purposes, unless at least one grantor or other person is not an exempt recipient and the trustee reports without treating any of the grantors or other persons as exempt recipients.

Optional Method 1.   For a trust treated as owned by one grantor or by one other person, the trustee must give all payers of income during the tax year the name and taxpayer identification number (TIN) of the grantor or other person treated as the owner of the trust and the address of the trust. This method may be used only if the owner of the trust provides the trustee with a signed Form W-9, Request for Taxpayer Identification Number and Certification. In addition, unless the grantor or other person treated as owner of the trust is the trustee or a co-trustee of the trust, the trustee must give the grantor or other person treated as owner of the trust a statement that:

• Shows all items of income, deduction, and credit of the trust;
• Identifies the payer of each item of income;
• Explains how the grantor or other person treated as owner of the trust takes those items into account when figuring the grantor's or other person's taxable income or tax; and
• Informs the grantor or other person treated as the owner of the trust that those items must be included when figuring taxable income and credits on his or her income tax return.

Grantor trusts that have not applied for an EIN and are going to file under Optional Method 1 do not need an EIN for the trust as long as they continue to report under that method.

Optional Method 2.   For a trust treated as owned by one grantor or by one other person, the trustee must give all payers of income during the tax year the name, address, and TIN of the trust. The trustee also must file with the IRS the appropriate Forms 1099 to report the income or gross proceeds paid to the trust during the tax year that shows the trust as the payer and the grantor or other person treated as owner as the payee. The trustee must report each type of income in the aggregate and each item of gross proceeds separately. The due date for any Forms 1099 required to be filed with the IRS by a trustee under this method is February 28, 2003 (March 31, 2003, if filed electronically).

In addition, unless the grantor or other person treated as owner of the trust is the trustee or a co-trustee of the trust, the trustee must give the grantor or other person treated as owner of the trust a statement that:

• Shows all items of income, deduction, and credit of the trust;
• Explains how the grantor or other person treated as owner of the trust takes those items into account when figuring the grantor's or other person's taxable income or tax; and
• Informs the grantor or other person treated as the owner of the trust that those items must be included when figuring taxable income and credits on his or her income tax return. This statement satisfies the requirement to give the recipient copies of the Forms 1099 filed by the trustee.

Optional Method 3.   For a trust treated as owned by two or more grantors or other persons, the trustee must give all payers of income during the tax year the name, address, and TIN of the trust. The trustee also must file with the IRS the appropriate Forms 1099 to report the income or gross proceeds paid to the trust by all payers during the tax year attributable to the part of the trust treated as owned by each grantor or other person, showing the trust as the payer and each grantor or other person treated as owner of the trust as the payee. The trustee must report each type of income in the aggregate and each item of gross proceeds separately. The due date for any Forms 1099 required to be filed with the IRS by a trustee under this method is February 28, 2003 (March 31, 2003, if filed electronically).

In addition, the trustee must give each grantor or other person treated as owner of the trust a statement that:

• Shows all items of income, deduction, and credit of the trust attributable to the part of the trust treated as owned by the grantor or other person;
• Explains how the grantor or other person treated as owner of the trust takes those items into account when figuring the grantor's or other person's taxable income or tax; and
• Informs the grantor or other person treated as the owner of the trust that those items must be included when figuring taxable income and credits on his or her income tax return. This statement satisfies the requirement to give the recipient copies of the Forms 1099 filed by the trustee.

Changing filing methods.   A trustee who previously had filed Form 1041 can change to one of the optional methods by filing a final Form 1041 for the tax year that immediately precedes the first tax year for which the trustee elects to report under one of the optional methods. On the front of the final Form 1041, the trustee must write Pursuant to section 1.671-4(g), this is the final Form 1041 for this grantor trust, and check the Final return box in item F.

For more details on changing reporting methods, including changes from one optional method to another, see Regulations section 1.671-4(g).

Backup withholding.   The following grantor trusts are treated as payors for purposes of backup withholding.

1. A trust established after 12/31/95, all of which is owned by 2 or more grantors (treating spouses filing a joint return as 1 grantor).
2. A trust with 10 or more grantors established after 12/31/83 but before 1/1/96.

For 2003, the trustee must withhold 30% of reportable payments made to any grantor who is subject to backup withholding.

For more information, see section 3406 and its Regulations.

Pooled Income Funds

If you are filing for a pooled income fund, attach a statement to support the following:

• The calculation of the yearly rate of return.
• The computation of the deduction for distributions to the beneficiaries.
• The computation of any charitable deduction.

You do not have to complete Schedules A or B of Form 1041.

If the fund has accumulations of income, file Form 1041-A unless the fund is required to distribute all of its net income to beneficiaries currently.

You must also file Form 5227, Split-Interest Trust Information Return, for the pooled income fund.

Electing Small Business Trusts

Special rules apply when figuring the tax on the S portion of an electing small business trust (ESBT). The S portion of an ESBT is the portion of the trust that consists of stock in one or more S corporations and is not treated as a grantor type trust. The tax on the S portion:

• Must be figured separately from the tax on the remainder of the ESBT (if any) and attached to the return,
• Is entered to the left of the Schedule G, line 7, entry space preceded by Sec. 641(c), and
• Is included in the total tax on Schedule G, line 7.

The tax on the remainder (non-S portion) of the ESBT is figured in the normal manner on Form 1041.

Tax computation attachment.   Attach to the return the tax computation for the S portion of the ESBT.

To compute the tax on the S portion:

• Treat that portion of the ESBT as if it were a separate trust.
• Include only the income, losses, deductions, and credits allocated to the ESBT as an S corporation shareholder and gain or loss from the disposition of S corporation stock.
• Aggregate items of income, losses, deductions, and credits allocated to the ESBT as an S corporation shareholder if the S portion of the ESBT has stock in more than one S corporation.
• Deduct state and local income taxes and administrative expenses directly related to the S portion or allocated to the S portion if the allocation is reasonable in light of all the circumstances.
• Do not claim a deduction for capital losses in excess of capital gains.
• Do not claim an income distribution deduction or an exemption amount.
• Do not deduct interest on money borrowed by the trust to buy S corporation stock.
• Do not use the tax rate schedule to figure the tax. The tax is 38.6% of the S portion's taxable income except in figuring the maximum tax on capital gains.
• Do not claim an exemption amount in figuring the alternative minimum tax.

For additional information, see Regulations section 1.641(c)-1.

Other information.   When figuring the tax and DNI on the remaining (non-S) portion of the trust, disregard the S corporation items.

Do not apportion to the beneficiaries any of the S corporation items.

If the ESBT consists entirely of stock in one or more S corporations, do not make any entries on lines 1-22 of page 1. Instead:

• Complete the entity portion;
• Follow the instructions above for figuring the tax on the S corporation items;
• Carry the tax from line 7 of Schedule G to line 23 on page 1; and
• Complete the rest of the return.

The grantor portion (if any) of an ESBT will follow the rules discussed under Grantor Type Trusts on page 4.

Electronic and Magnetic Media Filing

Qualified fiduciaries or transmitters may be able to file Form 1041 and related schedules electronically or on magnetic media. Tax return data may be filed electronically using telephone lines or on magnetic media using magnetic tape or floppy diskette.

If you wish to do this, you must file Form 9041, Application/Registration for Electronic/Magnetic Media Filing of Business Returns. If you file Form 1041 electronically or on magnetic media, you must also file Form 8453-F, U.S. Estate or Trust Income Tax Declaration and Signature for Electronic and Magnetic Media Filing. For more details, get Pub. 1437, Procedures for Electronic and Magnetic Media Filing of U.S. Income Tax Returns for Estates and Trusts, Form 1041 for Tax Year 2002, and Pub. 1438, File Specifications, Validation Criteria, and Record Layouts for Electronic and Magnetic Media Filing of U.S. Income Tax Returns for Estates and Trusts, Form 1041, for Tax Year 2002. To order these forms and publications, or for more information on electronic and magnetic media filing of Form 1041, call the Magnetic Media Unit at the Philadelphia Service Center at 215-516-7619 (not a toll-free number), or write to:

Internal Revenue Service Center
Attention: ELF Processing Support Section-DP N-144
11601 Roosevelt Blvd.
Philadelphia, PA 19154

When To File

For calendar year estates and trusts, file Form 1041 and Schedules K-1 on or before April 15, 2003. For fiscal year estates and trusts, file Form 1041 by the 15th day of the 4th month following the close of the tax year. If the due date falls on a Saturday, Sunday, or legal holiday, file on the next business day. For example, an estate that has a tax year that ends on June 30, 2003, must file Form 1041 by October 15, 2003.

Private Delivery Services

You 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, Second Day Service.
• DHL Worldwide Express (DHL): DHL Same Day Service, DHL USA Overnight.
• Federal Express (FedEx): FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2Day, FedEx International Priority, 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, UPS Worldwide Express.

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

Extension of Time To File

Estates.   Use Form 2758, Application for Extension of Time To File Certain Excise, Income, Information, and Other Returns, to apply for an extension of time to file.

Trusts.   Use Form 8736, Application for Automatic Extension of Time To File U.S. Return for a Partnership, REMIC, or for Certain Trusts, to request an automatic 3-month extension of time to file.

If more time is needed, file Form 8800, Application for Additional Extension of Time To File U.S. Return for a Partnership, REMIC, or for Certain Trusts, for an additional extension of up to 3 months. To obtain this additional extension of time to file, you must show reasonable cause for the additional time you are requesting. Form 8800 must be filed by the extended due date for Form 1041.

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