Instructions for Form 1120-SF (02/2007)

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 settlement 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. Settlement 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. See the Instructions for Form 1120, U.S. Corporation Income Tax Return, for details.

Private delivery services cannot deliver items to P.O. boxes. The fund 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.

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.

The authorization will automatically end no later that the due date (excluding extensions) for filing the fund'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.

Assembling the Return

To ensure that the fund's tax return is processed correctly, attach all 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.

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	P.O. Box 409101 Ogden, UT 84409

Depository Method of Tax Payment

Generally, the following apply to deposits of tax payments.

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 fund must make electronic deposits of all depository taxes (such as employment tax, excise tax, and fund income tax) using the Electronic Federal Tax Payment System (EFTPS) 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 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.
If the fund does not use EFTPS, deposit fund income tax payments (and estimated tax payments) with Form 8109, Federal Tax Deposit Coupon. If the fund does not have a preprinted Form 8109, use Form 8109-B to make deposits. Get this form by calling 1-800-829-4933 or by visiting an IRS taxpayer assistance center. Have the fund's EIN ready when calling or visiting.

For more information on deposits, see the instructions for 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 payments 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. 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.
If the fund does not use EFTPS, use the deposit coupons (Forms 8109) to make deposits of 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. 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.

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.

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, 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.

Penalties. 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. 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. These penalties will not be imposed if the fund can show that the failure to pay on time was due to reasonable cause.

The trust and 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. 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 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.

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.

Additional Information

See the Instructions for Form 1120 and Publication 542, Corporations, for more information about corporations including additional forms the fund may need to file and how to get forms and publications.

Definitions

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, and
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); and
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 for settlement funds created before May 18, 2006.
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.

Note.

Settlement Fund's created after May 17, 2006, for the purpose of resolving or satisfying liabilities under the CERCLA are exempt from tax.

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.

Qualified payment. 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).

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.

Other 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).

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