Assembly and Attachments

Assemble any schedules, forms and/or attachments behind Form 1041 in the following order:

1. Schedule D (Form 1041),
2. Schedule H (Form 1040),
3. Form 4136,
4. All other schedules and forms, and
5. All attachments.

Attachments

If you need more space on the forms or schedules, attach separate sheets. Use the same size and format as on the printed forms. But show the totals on the printed forms.

Attach these separate sheets after all the schedules and forms. Enter the estate's or trust's EIN on each sheet.

Do not file a copy of the decedent's will or the trust instrument unless the IRS requests it.

Additional Information

The following publications may assist you in preparing Form 1041.

Pub. 550,   Investment Income and Expenses, and

Pub. 559,   Survivors, Executors, and Administrators.

Of Special Interest to Bankruptcy Trustees and Debtors-in-Possession

Taxation of Bankruptcy Estates of an Individual

The bankruptcy estate that is created when an individual debtor files a petition under either chapter 7 or 11 of title 11 of the U.S. Code is treated as a separate taxable entity. The bankruptcy estate is administered by a trustee or a debtor-in-possession. If the case is later dismissed by the bankruptcy court, the individual debtor is treated as if the bankruptcy petition had never been filed.

A separate taxable entity is not created if a partnership or corporation files a petition under any chapter of title 11 of the U.S. Code.

Who Must File

Every trustee (or debtor-in-possession) for an individual's bankruptcy estate under chapter 7 or 11 of title 11 of the U.S. Code must file a return if the bankruptcy estate has gross income of $6,925 or more for tax years beginning in 2002.

Failure to do so may result in an estimated Request for Administrative Expenses being filed by the IRS in the bankruptcy proceeding or a motion to compel filing of the return.

The filing of a tax return for the bankruptcy estate does not relieve the individual debtor of his or her (or their) individual tax obligations.

Employer Identification Number

Every bankruptcy estate of an individual required to file a return must have its own EIN. The SSN of the individual debtor cannot be used as the EIN for the bankruptcy estate.

Accounting Period

A bankruptcy estate is allowed to have a fiscal year. The period can be no longer than 12 months.

When To File

File Form 1041 on or before the 15th day of the 4th month following the close of the tax year. Use Form 2758 to apply for an extension of time to file.

Disclosure of Return Information

Under section 6103(e)(5), tax returns of individual debtors who have filed for bankruptcy under chapters 7 or 11 of title 11 are, upon written request, open to inspection by or disclosure to the trustee.

The returns subject to disclosure to the trustee are those for the year the bankruptcy begins and prior years. Use Form 4506, Request for Copy or Transcript of Tax Form, to request copies of the individual debtor's tax returns.

If the bankruptcy case was not voluntary, disclosure cannot be made before the bankruptcy court has entered an order for relief, unless the court rules that the disclosure is needed for determining whether relief should be ordered.

Transfer of Tax Attributes From the Individual Debtor to the Bankruptcy Estate

The bankruptcy estate succeeds to the following tax attributes of the individual debtor:

1. Net operating loss (NOL) carryovers;
2. Charitable contributions carryovers;
3. Recovery of tax benefit items;
4. Credit carryovers;
5. Capital loss carryovers;
6. Basis, holding period, and character of assets;
7. Method of accounting;
8. Unused passive activity losses;
9. Unused passive activity credits; and
10. Unused section 465 losses.

Income, Deductions, and Credits

Under section 1398(c), the taxable income of the bankruptcy estate generally is figured in the same manner as an individual. The gross income of the bankruptcy estate includes any income included in property of the estate as defined in Bankruptcy Code section 541. Also included is gain from the sale of property. To figure gain, the trustee or debtor-in-possession must determine the correct basis of the property.

To determine whether any amount paid or incurred by the bankruptcy estate is allowable as a deduction or credit, or is treated as wages for employment tax purposes, treat the amount as if it were paid or incurred by the individual debtor in the same trade or business or other activity the debtor engaged in before the bankruptcy proceedings began.

Administrative expenses.   The bankruptcy estate is allowed a deduction for any administrative expense allowed under section 503 of title 11 of the U.S. Code, and any fee or charge assessed under chapter 123 of title 28 of the U.S. Code, to the extent not disallowed under an Internal Revenue Code provision (e.g., section 263, 265, or 275).

Administrative expense loss.   When figuring a net operating loss, nonbusiness deductions (including administrative expenses) are limited under section 172(d)(4) to the bankruptcy estate's nonbusiness income. The excess nonbusiness deductions are an administrative expense loss that may be carried back to each of the 3 preceding tax years and forward to each of the 7 succeeding tax years of the bankruptcy estate. The amount of an administrative expense loss that may be carried to any tax year is determined after the net operating loss deductions allowed for that year. An administrative expense loss is allowed only to the bankruptcy estate and cannot be carried to any tax year of the individual debtor.

Carryback of net operating losses and credits.   If the bankruptcy estate itself incurs a net operating loss (apart from losses carried forward to the estate from the individual debtor), it can carry back its net operating losses not only to previous tax years of the bankruptcy estate, but also to tax years of the individual debtor prior to the year in which the bankruptcy proceedings began. Excess credits, such as the foreign tax credit, also may be carried back to pre-bankruptcy years of the individual debtor.

Exemption.   For tax years beginning in 2002, a bankruptcy estate is allowed a personal exemption of $3,000.

Standard deduction.   For tax years beginning in 2002, a bankruptcy estate that does not itemize deductions is allowed a standard deduction of $3,925.

Discharge of indebtedness.   In a title 11 case, gross income does not include amounts that normally would be included in gross income resulting from the discharge of indebtedness. However, any amounts excluded from gross income must be applied to reduce certain tax attributes in a certain order. Attach Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, to show the reduction of tax attributes.

Tax Rate Schedule

Figure the tax for the bankruptcy estate using the tax rate schedule below. Enter the tax on Form 1040, line 43.

If taxable income is:
Over -	But not over -	The tax is:	Of the amount over -
$0	$6,000	10%	$0
6,000	23,350	$600 + 15%	6,000
23,350	56,425	3,202.50 + 27%	23,350
56,425	85,975	12,132.75 + 30%	56,425
85,975	153,525	20,997.75 + 35%	85,975
153,525	------	44,640.25 + 38.6%	153,525

Prompt Determination of Tax Liability

To request a prompt determination of the tax liability of the bankruptcy estate, the trustee or debtor-in-possession must file a written application for the determination with the IRS. Send the request to the Small Business/Self-Employed Insolvency Territory Manager for the territory in which the bankruptcy case is pending. The application must be submitted in duplicate and executed under the penalties of perjury. The trustee or debtor-in-possession must submit with the application an exact copy of the return (or returns) filed by the trustee with the IRS for a completed tax period, and a statement of the name and location of the office where the return was filed. The envelope should be marked, Request for Prompt Determination. DO NOT OPEN IN MAILROOM.

The IRS will notify the trustee or debtor-in-possession within 60 days from receipt of the application whether the return filed by the trustee or debtor-in-possession has been selected for examination or has been accepted as filed. If the return is selected for examination, it will be examined as soon as possible. The IRS will notify the trustee or debtor-in-possession of any tax due within 180 days from receipt of the application or within any additional time permitted by the bankruptcy court.

See Rev. Proc. 81-17, 1981-1 C.B. 688.

Special Filing Instructions for Bankruptcy Estates

Use Form 1041 only as a transmittal for Form 1040. In the top margin of Form 1040 write Attachment to Form 1041. DO NOT DETACH. Attach Form 1040 to Form 1041. Complete only the identification area at the top of Form 1041. Enter the name of the individual debtor in the following format: John Q. Public Bankruptcy Estate. Beneath, enter the name of the trustee in the following format: Avery Snow, Trustee. In item D, enter the date the petition was filed or the date of conversion to a chapter 7 or 11 case.

Enter on Form 1041, line 23, the total tax from line 61 of Form 1040. Complete lines 24 through 29 of Form 1041, and sign and date it.

Specific Instructions

Name of Estate or Trust

Copy the exact name of the estate or trust from the Form SS-4, Application for Employer Identification Number, that you used to apply for the EIN.

If a grantor type trust (discussed below), write the name, identification number, and address of the grantor(s) or other owner(s) in parentheses after the name of the trust.

Name and Title of Fiduciary

Enter the name and title of the fiduciary. If the name entered is different than the name on the prior year's return, see Change in Fiduciary's Name on page 13.

Address

Include the suite, room, or other unit number after the street address.

If the Post Office does not deliver mail to the street address and the fiduciary has a P.O. box, show the box number instead of the street address.

If you change your address after filing Form 1041, use Form 8822, Change of Address, to notify the IRS.

If you have a new address and have not filed Form 8822, be sure to check the box in F for Change in fiduciary's address.

A. Type of Entity

Check the appropriate box that describes the entity for which you are filing the return.

If only a portion of a trust is a grantor type trust or if only a portion of an electing small business trust is the S portion, then more then one box can be checked.

Note:   There are special filing requirements for grantor type trusts, pooled income funds, electing small business trusts, and bankruptcy estates. See Special Filing Instructions for Grantor Type Trusts, Pooled Income Funds, and Electing Small Business Trusts on page 4, or Of Special Interest to Bankruptcy Trustees and Debtors-in-Possession on page 10.

Decedent's Estate

An estate of a deceased person is a taxable entity separate from the decedent. It generally continues to exist until the final distribution of the assets of the estate is made to the heirs and other beneficiaries. The income earned from the property of the estate during the period of administration or settlement must be accounted for and reported by the estate.

Simple Trust

A trust may qualify as a simple trust if:

1. The trust instrument requires that all income must be distributed currently;
2. The trust instrument does not provide that any amounts are to be paid, permanently set aside, or used for charitable purposes; and
3. The trust does not distribute amounts allocated to the corpus of the trust.

Complex Trust

A complex trust is any trust that does not qualify as a simple trust as explained above.

Qualified Disability Trust

A qualified disability trust is any nongrantor trust:

1. Described in 42 U.S.C. 1396p(c)(2)(B)(iv) and established solely for the benefit of an individual under 65 years of age who is disabled and
2. All the beneficiaries of which are determined by the Commissioner of Social Security to have been disabled for some part of the tax year within the meaning of 42 U.S.C. 1382c(a)(3).

A trust will not fail to meet 2 above just because the trust's corpus may revert to a person who is not disabled after the trust ceases to have any disabled beneficiaries.

ESBT (S Portion Only)

The S portion of an electing small business trust (ESBT) is the portion of the trust that consists of S corporation stock and that is not treated as owned by the grantor or another person. See page 5 of the instructions for more information about an ESBT.

Grantor Type Trust

A grantor type trust is a legal trust under applicable state law that is not recognized as a separate taxable entity for income tax purposes because the grantor or other substantial owners have not relinquished complete dominion and control over the trust.

Generally, for transfers made in trust after March 1, 1986, the grantor is treated as the owner of any portion of a trust in which he or she has a reversionary interest in either the income or corpus therefrom, if, as of the inception of that portion of the trust, the value of the reversionary interest is more than 5% of the value of that portion. Also, the grantor is treated as holding any power or interest that was held by either the grantor's spouse at the time that the power or interest was created or who became the grantor's spouse after the creation of that power or interest.

Mortgage pools.   The trustee of a mortgage pool, such as the Federal National Mortgage Association, collects principal and interest payments on each mortgage and makes distributions to the certificate holders. Each pool is considered a grantor type trust, and each certificate holder is treated as the owner of an undivided interest in the entire trust under the grantor trust rules. Certificate holders must report their proportionate share of the mortgage interest and other items of income on their individual tax returns.

Pre-need funeral trusts.   The purchasers of pre-need funeral services are the grantors and the owners of pre-need funeral trusts established under state laws. See Rev. Rul. 87-127, 1987-2 C.B. 156. However, the trustees of pre-need funeral trusts can elect to file the return and pay the tax for qualified funeral trusts. For more information, see Form 1041-QFT, U.S. Income Tax Return for Qualified Funeral Trusts.

Nonqualified deferred compensation plans.   Taxpayers may adopt and maintain grantor trusts in connection with nonqualified deferred compensation plans (sometimes referred to as rabbi trusts). Rev. Proc. 92-64, 1992-2 C.B. 422, provides a model grantor trust for use in rabbi trust arrangements. The procedure also provides guidance for requesting rulings on the plans that use these trusts.

Bankruptcy Estate

A chapter 7 or 11 bankruptcy estate is a separate and distinct taxable entity from the individual debtor for Federal income tax purposes. See Of Special Interest to Bankruptcy Trustees and Debtors-in-Possession on page 10.

For more information, see section 1398 and Pub. 908, Bankruptcy Tax Guide.

Pooled Income Fund

A pooled income fund is a split-interest trust with a remainder interest for a public charity and a life income interest retained by the donor or for another person. The property is held in a pool with other pooled income fund property and does not include any tax-exempt securities. The income for a retained life interest is figured using the yearly rate of return earned by the trust. See section 642(c) and the related regulations for more information.

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