Instructions for Form 1120-SF |
2006 Tax Year |
This is archived information that pertains only to the 2006 Tax Year. If you are looking for information for the current tax year, go to the Tax Prep Help Area.
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.
All section 468B designated and qualified settlement funds must file an annual income tax return on Form 1120-SF.
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. These private delivery services include only the following.
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DHL Express (DHL): DHL Same Day Service, DHL Next Day 10:30 am, DHL Next Day 12:00 pm, DHL Next Day 3:00 pm, and DHL 2nd Day
Service.
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Federal Express (FedEx): FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2Day, FedEx International Priority, and
FedEx
International First.
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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.
Private delivery services cannot deliver items to P.O. boxes. You must use the U.S. Postal Service to mail any items to an
IRS P.O. box address.
Extension of time to file.
File Form 7004, Application for Automatic 6-Month Extension of Time To File Certain Business Income Tax, Information,
and other Returns, to request
a 6-month extension of time to file. Generally, file Form 7004 by the regular due date of the return.
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:
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:
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Give the IRS any information that is missing from the return,
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Call the IRS for information about the processing of the return or the status of any related refund or payment(s), and
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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.
The authorization will automatically end no later than the due date (excluding extensions) for filing the funds's tax return
for the following
year. If the fund wants to expand the paid preparer's authorization or revoke the authorization before it ends, see Publication
947, Practice Before
the IRS and Power of Attorney.
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. Enter
the fund's name and employer identification number (EIN) on each supporting statement or attachment.
File the fund's return at the applicable IRS address listed below.
If the fund's principal business, office, or agency is located in:
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And the total assets at the end of the tax year (Form 1120-SF, Schedule L, line 6, column (b)) are:
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Use the following Internal Revenue Service Center address:
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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
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Less than $10 million
$10 million or more
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Cincinnati, OH 45999-0012
Ogden, UT 84201-0012
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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
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Any amount
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Ogden, UT 84201-0012
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A foreign country or U.S. possession
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Any amount
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Philadelphia, PA 19255-0012
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Depository Method of Tax Payment
The fund must pay any 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
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. 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.
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 or visiting
an IRS taxpayer
assistance center. Have your EIN ready when you call or visit.
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 (for example, 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. 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 Publication 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.
Generally, the following rules apply to the fund's payments of estimated tax.
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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.
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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.
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Use Form 1120-W, Estimated Tax for Corporations, as a worksheet to compute estimated tax. Complete Form 1120-W according to
its
instructions. However, you should multiply the expected modified gross income (see instructions for line 14 on page 4) by
the maximum corporate tax
rate in effect for the year. See section 11 for the current year maximum corporate tax rate.
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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.
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, substantial understatements of tax, and reportable transaction
understatements from
the due date (including extensions) to the date of payment. The interest charge is figured at a rate determined under section
6621.
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.
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 Publication 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, reportable transaction understatements,
and fraud. See sections
6662, 6662A, and 6663.
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.
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.
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 720,
Quarterly Federal Excise Tax Return. Use this form to report and pay environmental excise taxes, communications and
air transportation taxes, ship
passenger taxes, manufacturers' taxes, and certain other excise taxes.
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:
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Paid wages of $1,500 or more in any calendar quarter during the current calendar year or the preceding calendar year or
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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).
Administrator.
An administrator, which may include a trustee if the designated or qualified settlement fund is a trust, is (in order
of priority):
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The person designated or approved by the governmental authority that ordered or approved the fund.
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The person designated in the escrow agreement, settlement agreement, or other similar agreement governing the fund.
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The escrow agent, custodian, or other person in possession of the fund's assets.
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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:
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Governmental order or approval requirement,
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Resolve or satisfy requirement, and
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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:
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The arbitration award is judicially enforceable;
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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); and
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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:
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Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), as amended;
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Arising out of a tort, breach of contract, or violation of law; or
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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,
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The words “Regulations section 1.468B-1 Relation-Back Election” at the top of the first page.
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The name, address, and identifying number of each transferor.
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The name, address, and EIN of the qualified settlement fund.
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The date on which the qualified settlement fund is treated as coming into existence.
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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:
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It is established by a court order and completely extinguishes the taxpayer's tort liability.
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No amounts may be transferred to it other than in the form of a qualified payment (defined below).
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It must be administered by persons, a majority of whom are independent of the taxpayer.
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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.
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The taxpayer may not hold any beneficial interest in the income or corpus of it.
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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:
Important.
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.
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