us internal revenue service: i1041--1999

8/14/2019 US Internal Revenue Service: i1041--1999

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1999 Department of the TreasuryInternal Revenue ServiceInstructions for Form 1041and Schedules A, B, D, G,

I, J, and K-1U.S. Income Tax Return for Estates and TrustsSection references are to the Internal Revenue Code unless otherwise noted.

Paperwork Reduction Act Notice. We ask for the information on this form to carryout the Internal Revenue laws of the United States. You are required to give us theinformation. We need it to ensure that you are complying with these laws and to allowus to figure and collect the right amount of tax.

You are not required to provide the information requested on a form that is subjectto the Paperwork Reduction Act unless the form displays a valid OMB control number.Books or records relating to a form or its instructions must be retained as long as theircontents may become material in the administration of any Internal Revenue law.Generally, tax returns and return information are confidential, as required by Codesection 6103.

The time needed to complete and file this form and related schedules will varydepending on individual circumstances. The estimated average times are:

If you have comments concerning the accuracy of these time estimates orsuggestions for making this form and related schedules simpler, we would be happyto hear from you. You can write to the Tax Forms Committee, Western Area DistributionCenter, Rancho Cordova, CA 95743-0001. DO NOT send the tax form to this address.Instead, see Where To File on page 4.

Pending LegislationAt the time of printing, Congress wasconsidering legislation affecting theseinstructions. Included in the pendinglegislation are provisions that wouldchange the definition of a capital asset,modify the treatment of gains fromconstructive ownership transactions,repeal the use of installment method forcertain taxpayers, and limit the use of thenonaccrual experience method ofaccounting. See Pub. 553, Highlights of1999 Tax Changes, to find out if thislegislation was enacted, and details onthe changes.

A Change To NoteFor tax years beginning in 1999, therequirement to file a return for abankruptcy estate applies only if grossincome is at least $6,350.

Photographs of MissingChildrenThe Internal Revenue Service is a proudpartner with the National Center forMissing and Exploited Children.Photographs of missing children selectedby the Center may appear in instructionson pages that would otherwise be blank.

You can help bring these children homeby looking at the photographs and calling1-800-THE-LOST (1-800-843-5678) if yourecognize a child.

Unresolved Tax ProblemsMost problems can be resolved with onecontact by calling, writing, or visiting anIRS office. But if the estate or trust hastried unsuccessfully to resolve a problemwith the IRS, it should contact theTaxpayer Advocate's office. The estateor trust will be assigned a personal

Contents Page

Schedule D (Form 1041)CapitalGains and Losses . . . . . . . . . 24

Schedule J (Form 1041)Accumulation Distribution forCertain Complex Trusts . . . . . . 29

Schedule K-1 (Form 1041)Beneficiary's Share of Income,Deductions, Credits, etc. . . . . . 30

Form 1041 Schedule D Schedule J Schedule K-1

Recordkeeping 46 hr., 38 min. 27 hr., 59 min. 39 hr. , 28 min. 8 hr ., 51 min.Learning about the law or the form 18 hr., 25 min. 2 hr., 11 min. 1 hr., 17 min. 1 hr., 17 min.Preparing the form 34 hr., 53 min. 2 hr., 44 min. 1 hr., 59 min. 1 hr., 29 min.Copying, assembling, and sendingthe form to the IRS 4 hr., 17 min.

Contents PageContents Page

Of Special Interest to BankruptcyTrustees and Debtors-in-Possession . . . . . . . . . . . 7

A Change To Note . . . . . . . . . 1Photographs of Missing Children . . 1

Unresolved Tax Problems . . . . . 1Specific Instructions . . . . . . . 8

How To Get Forms and Publications 2Name of Estate or Trust . . . . . . 8

General Instructions . . . . . . . . 2Address . . . . . . . . . . . . . . 8

Purpose of Form . . . . . . . . . . 2 Type of Entity . . . . . . . . . . . 8Income Taxation of Trusts and

Decedents' Estates . . . . . . . . 2Number of Schedules K-1 Attached 10

Employer Identification Number . . . 10Abusive Trust Arrangements . . . . 2

Date Entity Created . . . . . . . . . 10Definitions . . . . . . . . . . . . . . 3

Nonexempt Charitable andSplit-Interest Trusts . . . . . . . . 10

Who Must File . . . . . . . . . . . 3

Electronic and Magnetic Media Filing 4Initial Return, Amended Return, Final

Return; or Change in Fiduciary's

Name or Address . . . . . . . . . 10

When To File . . . . . . . . . . . . 4

Period Covered . . . . . . . . . . . 4Pooled Mortgage Account . . . . . 10Where To File . . . . . . . . . . . . 4Income . . . . . . . . . . . . . . . 10Who Must Sign . . . . . . . . . . . 5Deductions . . . . . . . . . . . . . 11Accounting Methods . . . . . . . . 5Tax and Payments . . . . . . . . . 14Accounting Periods . . . . . . . . . 5Schedule ACharitable Deduction . 15Rounding Off to Whole Dollars . . . 5Schedule BIncome Distribution

Deduction . . . . . . . . . . . . . 16Estimated Tax . . . . . . . . . . . 5

Interest and Penalties . . . . . . . . 5Schedule GTax Computation . . . 17

Other Forms That May Be Required 6Other Information . . . . . . . . . . 18

Assembly and Attachments . . . . . 7Schedule IAlternative Minimum Tax 19

Additional Information . . . . . . . . 7

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advocate who is in the best position to tryto resolve the problem.

Contact the Taxpayer Advocate if theestate or trust:q Is suffering or about to suffer asignificant hardship.q Is facing an immediate threat ofadverse action.q Will incur significant costs if relief is notgranted (including fees for professionalrepresentation).q Will suffer irreparable injury or

long-term adverse impact if relief is notgranted.q Has experienced a delay of more than30 calendar days to resolve a tax problemor inquiry.q Has not received a response orresolution to the problem by the datepromised.

The estate or trust may contact aTaxpayer Advocate by calling a toll-freeassistance number, 1-877-777-4778.Persons who have access to TTY/TDDequipment may call 1-800-829-4059 andask for the Taxpayer Advocate. If theestate or trust prefers, it may write to theTaxpayer Advocate at the IRS office that

last contacted the estate or trust.While Taxpayer Advocates cannot

change the tax law or make a technicaltax decision, they can clear up problemsthat resulted from previous contacts andensure that the estate's or trust's case isgiven a complete and impartial review.For more information about the TaxpayerAdvocate, see Pub. 1546, The TaxpayerAdvocate Service of the IRS.

How To Get Forms andPublications

Personal Computer

You can access the IRS's Internet website 24 hours a day, 7 days a week atwww.irs.gov to:q Download forms, instructions, andpublications.q See answers to frequently asked taxquestions.q Search publications on-line by topic orkeyword.q Send us comments or request help viae-mail.q Sign up to receive local and national taxnews by e-mail.

You can also reach us using filetransfer protocol at ftp.irs.ustreas.gov.

CD-ROMOrder Pub. 1796, Federal Tax Productson CD-ROM, and get:q Current year forms, instructions, andpublications.q Prior year forms, instructions, andpublications.q Popular tax forms that may be filled inelectronically, printed out for submission,and saved for recordkeeping.q The Internal Revenue Bulletin.

Buy the CD-ROM on the Internet atwww.irs.gov/cdorders from the NationalTechnical Information Service (NTIS) for

$16 (plus a $5 handling fee) and save30%, or call 1-877-CDFORMS(1-877-233-6767) toll free to buy theCD-ROM for $23 (plus a $5 handling fee).

By Phone and in Person

You can order forms and publications 24hours a day, 7 days a week, by calling1-800-TAX-FORM (1-800-829-3676). Youcan also get most forms and publicationsat your local IRS office.

General InstructionsPurpose of FormThe fiduciary of a domestic decedent'sestate, trust, or bankruptcy estate usesForm 1041 to report:q The income, deductions, gains, losses,etc. of the estate or trust;q The income that is either accumulatedor held for future distribution or distributedcurrently to the beneficiaries;q Any income tax liability of the estate ortrust; andq Employment taxes on wages paid tohousehold employees.

Income Taxation of Trustsand Decedents' EstatesA trust (except a grantor type trust) or adecedent's estate is a separate legalentity for Federal tax purposes. Adecedent's estate comes into existenceat the time of death of an individual. Atrust may be created during an individual'slife (inter vivos) or at the time of his or herdeath under a will (testamentary). If thetrust instrument contains certainprovisions, then the person creating thetrust (the grantor) is treated as the ownerof the trust's assets. Such a trust is agrantor type trust.

A trust or decedent's estate figures itsgross income in much the same manneras an individual. Most deductions andcredits allowed to individuals are alsoallowed to estates and trusts. However,there is one major distinction. A trust ordecedent's estate is allowed an incomedistribution deduction for distributions tobeneficiaries. To figure this deduction, thefiduciary must complete Schedule B. Theincome distribution deduction determinesthe amount of any distributions taxed tothe beneficiaries.

For this reason, a trust or decedent'sestate sometimes is referred to as apass-through entity. The beneficiary,

and not the trust or decedent's estate,pays income tax on his or her distributiveshare of income. Schedule K-1 (Form1041) is used to notify the beneficiariesof the amounts to be included on theirincome tax returns.

Before preparing Form 1041, thefiduciary must figure the accountingincome of the estate or trust under thewill or trust instrument and applicablelocal law to determine the amount, if any,of income that is required to bedistributed, because the income

distribution deduction is based, in part, onthat amount.

Abusive Trust ArrangementsCertain trust arrangements purport toreduce or eliminate Federal taxes in waysthat are not permitted under the law.Abusive trust arrangements typically arepromoted by the promise of tax benefitswith no meaningful change in thetaxpayer's control over or benefit from thetaxpayer's income or assets. The

promised benefits may include reductionor elimination of income subject to tax;deductions for personal expenses paid bythe trust; depreciation deductions of anowner's personal residence andfurnishings; a stepped-up basis forproperty transferred to the trust; thereduction or elimination ofself-employment taxes; and the reductionor elimination of gift and estate taxes.These promised benefits are inconsistentwith the tax rules applicable to abusivetrust arrangements.

Abusive trust arrangements often usetrusts to hide the true ownership of assetsand income or to disguise the substance

of transactions. These arrangementsfrequently involve more than one trust,each holding different assets of thetaxpayer (e.g., the taxpayer's business,business equipment, home, automobile,etc.). Some trusts may hold interests inother trusts, purport to involve charities,or are foreign trusts. Funds may flowfrom one trust to another trust by way ofrental agreements, fees for services,purchase agreements, and distributions.

Some of the abusive trustarrangements that have been identifiedinclude unincorporated business trusts (ororganizations), equipment or servicetrusts, family residence trusts, charitabletrusts, and final trusts. In each of these

trusts, the original owner of the assetsthat are nominally subject to the trusteffectively retains the authority to causefinancial benefits of the trust to be directlyor indirectly returned or made available tothe owner. For example, the trustee maybe the promoter, or a relative or friend ofthe owner who simply carries out thedirections of the owner whether or notpermitted by the terms of the trust.

When trusts are used for legitimatebusiness, family, or estate planningpurposes, either the trust, the beneficiary,or the transferor to the trust will pay thetax on income generated by the trustproperty. Trusts cannot be used to

transform a taxpayer's personal, living, oreducational expenses into deductibleitems, and will not seek to avoid taxliability by ignoring either the trueownership of income and assets or thetrue substance of transactions. Therefore,the tax results promised by the promotersof abusive trust arrangements are notallowable under the law, and theparticipants in and promoters of thesearrangements may be subject to civil orcriminal penalties in appropriate cases.

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For more details, including the legalprinciples that control the proper taxtreatment of these abusive trustarrangements, see Notice 97-24, 1997-1C.B. 409 or I.R.B. 97-16, 6.

Definitions

Beneficiary

A beneficiary includes an heir, a legatee,or a devisee.

Distributable Net Income (DNI)The income distribution deductionallowable to estates and trusts foramounts paid, credited, or required to bedistributed to beneficiaries is limited todistributable net income (DNI). Thisamount, which is figured on Schedule B,line 7, is also used to determine howmuch of an amount paid, credited, orrequired to be distributed to a beneficiarywill be includible in his or her grossincome.

Income, Deductions, and Credits inRespect of a Decedent

Income. When completing Form 1041,

you must take into account any items thatare income in respect of a decedent(IRD).

In general, income in respect of adecedent is income that a decedent wasentitled to receive but that was notproperly includible in the decedent's finalincome tax return under the decedent'smethod of accounting.

IRD includes:q All accrued income of a decedent whoreported his or her income on the cashmethod of accounting;q Income accrued solely because of thedecedent's death in the case of adecedent who reported his or her income

on the accrual method of accounting; andq Income to which the decedent had acontingent claim at the time of his or herdeath.

Some examples of IRD of a decedentwho kept his or her books on the cashmethod are:q Deferred salary payments that arepayable to the decedent's estate.q Uncollected interest on U.S. savingsbonds.q Proceeds from the completed sale offarm produce.q The portion of a lump-sum distributionto the beneficiary of a decedent's IRA thatequals the balance in the IRA at the time

of the owner's death. This includesunrealized appreciation and incomeaccrued to that date, less the aggregateamount of the owner's nondeductiblecontributions to the IRA. Such amountsare included in the beneficiary's grossincome in the tax year that the distributionis received.

The IRD has the same character itwould have had if the decedent lived andreceived such amount.Deductions and credits. The followingdeductions and credits, when paid by thedecedent's estate, are allowed on Form

1041 even though they were not allowableon the decedent's final income tax return:q Business expenses deductible undersection 162.q Interest deductible under section 163.q Taxes deductible under section 164.q Investment expenses described insection 212 (in excess of 2% of AGI).q Percentage depletion allowed undersection 611.q Foreign tax credit.

For more information, see section 691.

Income Required To Be DistributedCurrently

Income required to be distributedcurrently is income that is required underthe terms of the governing instrument andapplicable local law to be distributed in theyear it is received. The fiduciary must beunder a duty to distribute the incomecurrently, even if the actual distribution isnot made until after the close of the trust'stax year. See Regulations section1.651(a)-2.

Fiduciary

A fiduciary is a trustee of a trust; or an

executor, executrix, administrator,administratrix, personal representative, orperson in possession of property of adecedent's estate.Note: Any reference in these instructionsto you means the fiduciary of the estateor trust.

Trust

A trust is an arrangement created eitherby a will or by an inter vivos declarationby which trustees take title to property forthe purpose of protecting or conserving itfor the beneficiaries under the ordinaryrules applied in chancery or probatecourts.

Who Must File

Decedent's Estate

The fiduciary (or one of the jointfiduciaries) must file Form 1041 for adomestic estate that has:

1. Gross income for the tax year of$600 or more, or

2. A beneficiary who is a nonresidentalien.

An estate is a domestic estate if it isnot a foreign estate. A foreign estate isone the income of which, from sourcesoutside the United States that is noteffectively connected with the conduct ofa U.S. trade or business, is not includiblein gross income. If you are the fiduciaryof a foreign estate, file Form 1040NR,U.S. Nonresident Alien Income TaxReturn, instead of Form 1041.

Trust

The fiduciary (or one of the jointfiduciaries) must file Form 1041 for adomestic trust taxable under section 641that has:

1. Any taxable income for the tax year,or

2. Gross income of $600 or more(regardless of taxable income), or

3. A beneficiary who is a nonresidentalien.

Two or more trusts are treated as onetrust if such trusts have substantially thesame grantor(s) and substantially thesame primary beneficiary(ies), and aprincipal purpose of such trusts isavoidance of tax. This provision appliesonly to that portion of the trust that isattributable to contributions to corpus

made after March 1, 1984.A trust is a domestic trust if:q A U.S. court is able to exercise primarysupervision over the administration of thetrust (court test), andq One or more U.S. persons have theauthority to control all substantialdecisions of the trust (control test).

Also treated as a domestic trust is atrust (other than a trust treated as whollyowned by the grantor) that:q Was in existence on August 20, 1996,q Was treated as a domestic trust onAugust 19, 1996, andq Elected to continue to be treated as adomestic trust.

See T.D. 8813, I.R.B. 1999-9, 34 formore information on the court and controltests. See also Notice 96-65, 1996-2 C.B.232, under which a trust (including awholly-owned grantor trust) may amendthe provisions of the trust in order to meetthe new statutory requirements.

A trust that is not a domestic trust istreated as a foreign trust. If you are thetrustee of a foreign trust, file Form1040NR instead of Form 1041. Also, aforeign trust with a U.S. owner generallymust file Form 3520-A, AnnualInformation Return of Foreign Trust Witha U.S. Owner.

If a domestic trust becomes a foreign

trust, it is treated under section 684 ashaving transferred all of its assets to aforeign trust, except to the extent agrantor or another person is treated as theowner of the trust when the trust becomesa foreign trust.

Special Rule for Certain RevocableTrusts

Section 645 provides that the executor ofan estate and the trustee of a qualifiedrevocable trust can elect to treat the trustas part of the estate instead of filing aseparate Form 1041 for the trust. Theelection applies to all tax years of theestate ending after the date of the

decedent's death and before theapplicable date, as defined below. Oncemade, the election is irrevocable.Qualified revocable trusts. A qualifiedrevocable trust for this purpose is anytrust or portion of a trust that is treatedunder section 676 as owned by thedecedent whose estate is making theelection because of a power in the grantorof the trust to revoke the trust. For thispurpose, a power does not include anypower in the grantor that is treated as heldby the grantor because it is held by hisor her spouse.

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Applicable date. The applicable date iseither:q If the estate is required to file a Federalestate tax return, the date that is 6 monthsafter the date of the final determination ofthe Federal estate tax liability, orq If the estate is not required to file aFederal estate tax return, the date that is2 years after the date of the decedent'sdeath.Making the election. You make theelection by attaching a statement to Form

1041. The original statement must beattached to Form 1041 filed by the duedate (including extensions) for the estatefor its first tax year. If the revocable trustmust file a Form 1041 for the tax yearending after the date of the decedent'sdeath, you must attach a copy of thestatement to that return.

See Rev. Proc. 98-13, I.R.B. 1998-4,21 for details of what you must include inthe statement and for additionalinformation on the election.

Bankruptcy Estate

The bankruptcy trustee or debtor-in-possession must file Form 1041 for the

estate of an individual involved inbankruptcy proceedings under chapter 7or 11 of title 11 of the United States Codeif the estate has gross income for the taxyear of $6,350 or more. See Of SpecialInterest To Bankruptcy Trustees andDebtors-in-Possession on page 7 forother details.

Common Trust Funds

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

Qualified Settlement FundsThe trustee of a designated or qualifiedsettlement fund must file Form 1120-SF,U.S. Income Tax Return for SettlementFunds, rather than Form 1041.

Electronic and MagneticMedia FilingQualified fiduciaries or transmitters maybe able to file Form 1041 and relatedschedules electronically or on magneticmedia. Tax return data may be filedelectronically using telephone lines or onmagnetic media using magnetic tape orfloppy diskette.

If you wish to do this, you must fileForm 9041, Application forElectronic/Magnetic Media Filing ofBusiness and Employee Benefit PlanReturns. If you file Form 1041electronically or on magnetic media, youmust also file Form 8453-F, U.S. Estateor Trust Income Tax Declaration andSignature for Electronic and MagneticMedia Filing. For more details, get Pub.1437, Procedures for Electronic andMagnetic Media Filing of U.S. Income TaxReturns for Estates and Trusts, Form

1041 for 1999, and Pub. 1438, FileSpecifications, Validation Criteria, andRecord Layouts for Electronic andMagnetic Media Filing of Estate and TrustReturns, Form 1041. To order these formsand publications, or for more informationon electronic and magnetic media filingof Form 1041, call the Magnetic MediaUnit at the Philadelphia Service Center at215-516-7533 (not a toll-free number), orwrite to:

Internal Revenue Service Center

Attention: Magnetic Media UnitDP 11511601 Roosevelt Blvd.Philadelphia, PA 19154

When To FileFor calendar year estates and trusts, fileForm 1041 and Schedules K-1 on orbefore April 17, 2000. For fiscal yearestates and trusts, file Form 1041 by the15th day of the 4th month following theclose of the tax year. If the due date fallson a Saturday, Sunday, or legal holiday,file on the next business day. Forexample, an estate that has a tax yearthat ends on June 30, 2000, must fileForm 1041 by October 16, 2000.

Private Delivery Services

You can use certain private deliveryservices designated by the IRS to meetthe timely mailing as timely filing/payingrule for tax returns and payments. Themost recent list of designated privatedelivery services was published by theIRS in August 1999. The list includes onlythe following:q Airborne Express (Airborne): OvernightAir Express Service, Next AfternoonService, Second Day Service.q DHL Worldwide Express (DHL): DHLSame Day Service, DHL USAOvernight.q

Federal Express (FedEx): FedExPriority Overnight, FedEx StandardOvernight, FedEx 2 Day.q United Parcel Service (UPS): UPS NextDay Air, UPS Next Day Air Saver, UPS2nd Day Air, UPS 2nd Day Air A.M.

The private delivery service can tell youhow to get written proof of the mailingdate.

Extension of Time To File

Estates. Use Form 2758, Application forExtension 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 forCertain Trusts, to request an automatic3-month extension of time to file.

If more time is needed, file Form 8800,Application for Additional Extension ofTime To File U.S. Return for aPartnership, REMIC, or for Certain Trusts,for an additional extension of up to 3months. To obtain this additionalextension of time to file, you must showreasonable cause for the additional timeyou are requesting. Form 8800 must be

filed by the extended due date for Form1041.

Period CoveredFile the 1999 return for calendar year1999 and fiscal years beginning in 1999and ending in 2000. If the return is for afiscal year or a short tax year (less than12 months), fill in the tax year space atthe top of the form.

The 1999 Form 1041 may also be usedfor a tax year beginning in 2000 if:

1. The estate or trust has a tax yearof less than 12 months that begins andends in 2000; and

2. The 2000 Form 1041 is notavailable by the time the estate or trust isrequired to file its tax return. However, theestate or trust must show its 2000 taxyear on the 1999 Form 1041 andincorporate any tax law changes that areeffective for tax years beginning afterDecember 31, 1999.

Where To FileFor all estates and trusts, exceptcharitable and split-interest trusts and

pooled income funds:

If you are located in

Please mail to thefollowing InternalRevenue Service

Center

New Jersey, New York (NewYork City and counties ofNassau, Rockland, Suffolk,and Westchester)

Holtsville, NY 00501

New York (all othercounties), Connecticut,Maine, Massachusetts, NewHampshire, Rhode Island,Vermont

Andover, MA 05501

Florida, Georgia, SouthCarolina

Atlanta, GA 39901

Indiana, Kentucky, Michigan,Ohio, West Virginia

Cincinnati, OH 45999

Kansas, New Mexico,Oklahoma, Texas

Austin, TX 73301

Alaska, Arizona, California(counties of Alpine, Amador,Butte, Calaveras, Colusa,Contra Costa, Del Norte, ElDorado, Glenn, Humboldt,Lake, Lassen, Marin,Mendocino, Modoc, Napa,Nevada, Placer, Plumas,Sacramento, San Joaquin,Shasta, Sierra, Siskiyou,Solano, Sonoma, Sutter,Tehama, Trinity, Yolo, andYuba), Colorado, Idaho,Montana, Nebraska, Nevada,North Dakota, Oregon, SouthDakota, Utah, Washington,

Wyoming

Ogden, UT 84201

California (all other counties),Hawaii

Fresno, CA 93888

Illinois, Iowa, Minnesota,Missouri, Wisconsin

Kansas City, MO 64999

Alabama, Arkansas,Louisiana, Mississippi, NorthCarolina, Tennessee

Memphis, TN 37501

Delaware, District ofColumbia, Maryland,Pennsylvania, Virginia, anyU.S. possession, or foreigncountry

Philadelphia, PA 19255

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For a charitable or split-interest trustdescribed in section 4947(a) and a pooledincome fund defined in section 642(c)(5):

Who Must Sign

Fiduciary

The fiduciary, or an authorizedrepresentative, must sign Form 1041.

A financial institution that submittedestimated tax payments for trusts forwhich it is the trustee must enter itsemployer identification number (EIN) inthe space provided for the EIN of the

fiduciary. Do not enter the EIN of the trust.For this purpose, a financial institution isone that maintains a Treasury Tax andLoan account. If you are an attorney orother individual functioning in a fiduciarycapacity, leave this space blank. DO NOTenter your individual social securitynumber (SSN).

If you, as fiduciary, fill in Form 1041,leave the Paid Preparer's space blank. Ifsomeone prepares this return and doesnot charge you, that person should notsign the return.

Paid Preparer

Generally, anyone who is paid to prepare

a tax return must sign the return and fillin the other blanks in the Paid Preparer'sUse Only area of the return.

The person required to sign the returnmust complete the required preparerinformation and:q Sign it in the space provided for thepreparer's signature. A facsimilesignature is acceptable if certainconditions are met. See Regulationssection 1.6695-1(b)(4)(iv) for details.q Give you a copy of the return in additionto the copy to be filed with the IRS.

Accounting MethodsFigure taxable income using the methodof accounting regularly used in keepingthe estate's or trust's books and records.Generally, permissible methods includethe cash method, the accrual method, orany other method authorized by theInternal Revenue Code. In all cases, themethod used must clearly reflect income.

Generally, the estate or trust maychange its accounting method (for incomeas a whole or for any material item) onlyby getting consent on Form 3115,Application for Change in AccountingMethod. For more information, see Pub.538, Accounting Periods and Methods.

Accounting PeriodsFor a decedent's estate, the moment ofdeath determines the end of thedecedent's tax year and the beginning ofthe estate's tax year. As executor oradministrator, you choose the estate's taxperiod when you file its first income taxreturn. The estate's first tax year may beany period of 12 months or less that endson the last day of a month. If you select

the last day of any month other thanDecember, you are adopting a fiscal taxyear.

To change the accounting period of anestate, get Form 1128, Application ToAdopt, Change, or Retain a Tax Year.

Generally, a trust must adopt acalendar year. The following trusts areexempt from this requirement:q A trust that is exempt from tax undersection 501(a);q A charitable trust described in section4947(a)(1); andq A trust that is treated as wholly ownedby a grantor under the rules of sections671 through 679.

Rounding Off to WholeDollarsYou may show the money items on thereturn and accompanying schedules aswhole-dollar amounts. To do so, dropamounts less than 50 cents and increaseany amounts from 50 to 99 cents to thenext dollar.

Estimated TaxGenerally, an estate or trust must payestimated income tax for 2000 if it expectsto owe, after subtracting any withholdingand credits, at least $1,000 in tax, and it

expects the withholding and credits to beless than the smaller of:1. 90% of the tax shown on the 2000

tax return, or2. 100% of the tax shown on the 1999

tax return (108.6% of that amount if theestate's or trust's adjusted gross incomeon that return is more than $150,000, andless than 2/3 of gross income for 1999 or2000 is from farming or fishing).

However, if a return was not filed for1999 or that return did not cover a full 12months, item 2 does not apply.

For this purpose, include householdemployment taxes in the tax shown on thetax return, but only if either of thefollowing is true:q The estate or trust will have Federalincome tax withheld for 2000 (see theinstructions on page 15 for line 24e), orq The estate or trust would be required tomake estimated tax payments for 2000even if it did not include householdemployment taxes when figuringestimated tax.

Exceptions

Estimated tax payments are not requiredfrom:

1. An estate of a domestic decedentor a domestic trust that had no tax liabilityfor the full 12-month 1999 tax year;

2. A decedent's estate for any tax yearending before the date that is 2 yearsafter the decedent's death; or

3. A trust that was treated as ownedby the decedent if the trust will receive theresidue of the decedent's estate under thewill (or if no will is admitted to probate, thetrust primarily responsible for payingdebts, taxes, and expenses of

administration) for any tax year endingbefore the date that is 2 years after thedecedent's death.

For more information, see Form1041-ES, Estimated Income Tax forEstates and Trusts.

Section 643(g) Election

Fiduciaries of trusts that pay estimated taxmay elect under section 643(g) to haveany portion of their estimated taxpayments allocated to any of thebeneficiaries.

The fiduciary of a decedent's estatemay make a section 643(g) election onlyfor the final year of the estate.

See the instructions on page 15 for line24b for more details.

Interest and Penalties

Interest

Interest is charged on taxes not paid bythe due date, even if an extension of timeto file is granted.

Interest is also charged on thefailure-to-file penalty, the accuracy-relatedpenalty, and the fraud penalty. Theinterest charge is figured at a ratedetermined under section 6621.

Late Filing of Return

The law provides a penalty of 5% amonth, or part of a month, up to amaximum of 25%, for each month thereturn is not filed. The penalty is imposedon the net amount due. If the return ismore than 60 days late, the minimumpenalty is the smaller of $100 or the taxdue. The penalty will not be imposed ifyou can show that the failure to file ontime was due to reasonable cause. If thefailure is due to reasonable cause, attachan explanation to the return.

If you are located in

Please mail to thefollowing InternalRevenue Service

Center

Alabama, Arkansas,Florida, Georgia, Louisiana,Mississippi, North Carolina,South Carolina, Tennessee

Atlanta, GA 39901

Arizona, Colorado, Kansas,New Mexico, Oklahoma,Texas, Utah, Wyoming

Austin, TX 73301

Indiana, Kentucky,Michigan, Ohio, WestVirginia

Cincinnati, OH 45999

Alaska, California, Hawaii,Idaho, Nevada, Oregon,Washington

Fresno, CA 93888

Connecticut, Maine,Massachusetts, NewHampshire, New York,Rhode Island, Vermont

Holtsville, NY 00501

Illinois, Iowa, Minnesota,Missouri, Montana,Nebraska, North Dakota,South Dakota, Wisconsin

Kansas City, MO 64999

Delaware, District ofColumbia, Maryland, NewJersey, Pennsylvania,Virginia, any U.S.possession, or foreigncountry

Philadelphia, PA 19255

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Late Payment of Tax

Generally, the penalty for not paying taxwhen due is 1/2 of 1% of the unpaidamount for each month or part of a monthit remains unpaid. The maximum penaltyis 25% of the unpaid amount. The penaltyis imposed on the net amount due. Anypenalty is in addition to interest chargeson late payments.

TIP

If you include interest or either ofthese penalties with your payment,identify and enter these amounts in

the bottom margin of Form 1041, page 1.Do notinclude the interest or penaltyamount in the balance of tax due online 27.

Failure To Provide InformationTimely

You must provide Schedule K-1 (Form1041), on or before the day you arerequired to file Form 1041, to eachbeneficiary who receives a distribution ofproperty or an allocation of an item of theestate.

For each failure to provide ScheduleK-1 to a beneficiary when due and eachfailure to include on Schedule K-1 all the

information required to be shown (or theinclusion of incorrect information), a $50penalty may be imposed with regard toeach Schedule K-1 for which a failureoccurs. The maximum penalty is$100,000 for all such failures during acalendar year. If the requirement to reportinformation is intentionally disregarded,each $50 penalty is increased to $100 or,if greater, 10% of the aggregate amountof items required to be reported, and the$100,000 maximum does not apply.

The penalty will not be imposed if thefiduciary can show that not providinginformation timely was due to reasonablecause and not due to willful neglect.

Underpaid Estimated Tax

If the fiduciary underpaid estimated tax,use Form 2210, Underpayment ofEstimated Tax by Individuals, Estates,and Trusts, to figure any penalty. Enterthe amount of any penalty on line 26,Form 1041.

Trust Fund Recovery Penalty

This penalty may apply if certain excise,income, social security, and Medicaretaxes that must be collected or withheldare not collected or withheld, or thesetaxes are not paid. These taxes aregenerally reported on Forms 720, 941,943, or 945. The trust fund recoverypenalty may be imposed on all personswho are determined by the IRS to havebeen responsible for collecting,accounting for, and paying over thesetaxes, and who acted willfully in not doingso. The penalty is equal to the unpaidtrust fund tax. See the instructions forForm 720, Pub. 15 (Circular E),Employer's Tax Guide, or Pub. 51(Circular A), Agricultural Employer's TaxGuide, for more details, including thedefinition of responsible persons.

Other Penalties

Other penalties can be imposed fornegligence, substantial understatementof tax, and fraud. See Pub. 17, YourFederal Income Tax, for details on thesepenalties.

Other Forms That May BeRequiredForms W-2 and W-3, Wage and TaxStatement; and Transmittal of Wage and

Tax Statements.Form 56, Notice Concerning FiduciaryRelationship.Form 706, United States Estate (andGeneration-Skipping Transfer) TaxReturn; or Form 706-NA, United StatesEstate (and Generation-SkippingTransfer) Tax Return, Estate ofnonresident not a citizen of the UnitedStates.Form 706-GS(D), Generation-SkippingTransfer Tax Return For Distributions.Form 706-GS(D-1), Notification ofDistribution From a Generation-SkippingTrust.Form 706-GS(T), Generation-Skipping

Transfer Tax Return for Terminations.Form 720, Quarterly Federal Excise TaxReturn. Use Form 720 to reportenvironmental excise taxes,communications and air transportationtaxes, fuel taxes, luxury tax on passengervehicles, manufacturers' taxes, shippassenger tax, and certain other excisetaxes.Caution: SeeTrust Fund RecoveryPenaltyabove.Form 926, Return by a U.S. Transferorof Property to a Foreign Corporation. Usethis form to report certain informationrequired under section 6038B.Form 940 or Form 940-EZ, Employer's

Annual Federal Unemployment (FUTA)Tax Return. The estate or trust may beliable for FUTA tax and may have to fileForm 940 or 940-EZ if it paid wages of$1,500 or more in any calendar quarterduring the calendar year (or the precedingcalendar year) or one or more employeesworked for the estate or trust for somepart of a day in any 20 different weeksduring the calendar year (or the precedingcalendar year).Form 941, Employer's Quarterly FederalTax Return. Employers must file this formquarterly to report income tax withheld onwages and employer and employee socialsecurity and Medicare taxes. Agricultural

employers must file Form 943,Employer's Annual Tax Return forAgricultural Employees, instead of Form941, to report income tax withheld andemployer and employee social securityand Medicare taxes on farmworkers.Caution: SeeTrust Fund RecoveryPenaltyabove.Form 945, Annual Return of WithheldFederal Income Tax. Use this form toreport income tax withheld fromnonpayroll payments, including pensions,annuities, IRAs, gambling winnings, andbackup withholding.

Caution: SeeTrust Fund RecoveryPenaltyabove.Form 1040, U.S. Individual Income TaxReturn.Form 1040NR, U.S. Nonresident AlienIncome Tax Return.Form 1041-A, U.S. Information ReturnTrust Accumulation of CharitableAmounts.Forms 1042 and 1042-S, AnnualWithholding Tax Return for U.S. SourceIncome of Foreign Persons; and Foreign

Person's U.S. Source Income Subject toWithholding. Use these forms to reportand transmit withheld tax on payments ordistributions made to nonresident alienindividuals, foreign partnerships, orforeign corporations to the extent suchpayments or distributions constitute grossincome from sources within the UnitedStates that is not effectively connectedwith a U.S. trade or business. For moreinformation, see sections 1441 and 1442,and Pub. 515, Withholding of Tax onNonresident Aliens and ForeignCorporations.Forms 1099-A, B, INT, LTC, MISC, MSA,OID, R, and S. You may have to file

these information returns to reportacquisitions or abandonments of securedproperty; proceeds from broker and barterexchange transactions; interestpayments; payments of long-term careand accelerated death benefits;miscellaneous income payments;distributions from a medical savingsaccount (MSA) or Medicare + ChoiceMSA; original issue discount; distributionsfrom pensions, annuities, retirement orprofit-sharing plans, IRAs, insurancecontracts, etc.; and proceeds from realestate transactions.

Also, use certain of these returns toreport amounts received as a nominee onbehalf of another person, except amounts

reported to beneficiaries on Schedule K-1(Form 1041).Form 8275, Disclosure Statement. FileForm 8275 to disclose items or positions,except those contrary to a regulation, thatare not otherwise adequately disclosedon a tax return. The disclosure is made toavoid parts of the accuracy-relatedpenalty imposed for disregard of rules orsubstantial understatement of tax. Form8275 is also used for disclosures relatingto preparer penalties for understatementsdue to unrealistic positions or disregardof rules.Form 8275-R, Regulation DisclosureStatement, is used to disclose any item

on a tax return for which a position hasbeen taken that is contrary to Treasuryregulations.Forms 8288 and 8288-A, U.S.Withholding Tax Return for Dispositionsby Foreign Persons of U.S. Real PropertyInterests; and Statement of Withholdingon Dispositions by Foreign Persons ofU.S. Real Property Interests. Use theseforms to report and transmit withheld taxon the sale of U.S. real property by aforeign person. Also, use these forms toreport and transmit tax withheld fromamounts distributed to a foreign

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beneficiary from a U.S. real propertyinterest account that a domestic estateor trust is required to establish underRegulations section 1.1445-5(c)(1)(iii).Form 8300, Report of Cash PaymentsOver $10,000 Received in a Trade orBusiness. Generally, this form is used toreport the receipt of more than $10,000 incash or foreign currency in onetransaction (or a series of relatedtransactions).Form 8865, Return of U.S. Persons With

Respect to Certain Foreign Partnerships.The estate or trust may have to file thisform if it contributed property after August5, 1997, to a foreign partnership inexchange for a partnership interest and(a) immediately after the contribution theestate or trust owned, either directly orindirectly, at least a 10% interest in theforeign partnership or (b) the fair marketvalue of the property contributed to theforeign partnership in exchange for thepartnership interest, when added to othercontributions of property made to thepartnership during the preceding12-month period, exceeds $100,000.Also, the estate or trust may have to fileForm 8865 to report certain dispositions

by the foreign partnership of propertypreviously contributed to it by the estateor trust if the estate or trust was still apartner at the time of disposition. Formore details, including penalties that mayapply, see Form 8865 and its separateinstructions.

Assembly and AttachmentsAssemble any schedules, forms and/orattachments behind Form 1041 in thefollowing order:

1. Schedule D (Form 1041),2. Schedule H (Form 1040),3. Form 4136,

4. All other schedules and forms, and5. All attachments.

Attachments

If you need more space on the forms orschedules, attach separate sheets. Usethe same size and format as on theprinted forms. But show the totals onthe printed forms.

Attach these separate sheets after allthe schedules and forms. Enter theestate's or trust's EIN on each sheet.

Do not file a copy of the decedent's willor the trust instrument unless the IRSrequests it.

Additional InformationThe following publications may assist youin preparing Form 1041.Pub. 550, Investment Income andExpenses; andPub. 559, Survivors, Executors, andAdministrators.

Of Special Interest toBankruptcy Trustees andDebtors-in-Possession

Taxation of Bankruptcy Estates ofan Individual

A bankruptcy estate is a separate taxableentity created when an individual debtorfiles a petition under either chapter 7 or11 of title 11 of the U.S. Code. The estateis administered by a trustee or adebtor-in-possession. If the case is laterdismissed by the bankruptcy court, thedebtor is treated as if the bankruptcypetition had never been filed. Thisprovision does NOT apply to partnershipsor corporations.

Who Must File

Every trustee (or debtor-in-possession)for an individual's bankruptcy estate underchapter 7 or 11 of title 11 of the U.S. Codemust file a return if the bankruptcy estatehas gross income of $6,350 or more fortax years beginning in 1999.

Failure to do so may result in an

estimated Request for AdministrativeExpenses being filed by the IRS in thebankruptcy proceeding or a motion tocompel filing of the return.Important: The filing of a tax return forthe bankruptcy estate does not relieve theindividual debtor of his or her (or their)individual tax obligations.

Employer Identification Number

Every bankruptcy estate of an individualrequired to file a return must have its ownEIN. The SSN of the individual debtorcannot be used as the EIN for thebankruptcy estate.

Accounting PeriodA bankruptcy estate is allowed to have afiscal year. The period can be no longerthan 12 months.

When To File

File Form 1041 on or before the 15th dayof the 4th month following the close of thetax year. Use Form 2758 to apply for anextension of time to file.

Disclosure of Return Information

Under section 6103(e)(5), tax returns ofindividual debtors who have filed forbankruptcy under chapters 7 or 11 of title11 are, upon written request, open to

inspection by or disclosure to the trustee.The returns subject to disclosure to thetrustee are those for the year thebankruptcy begins and prior years. UseForm 4506, Request for Copy orTranscript of Tax Form, to request copiesof the individual debtor's tax returns.

If the bankruptcy case was notvoluntary, disclosure cannot be madebefore the bankruptcy court has enteredan order for relief, unless the court rulesthat the disclosure is needed fordetermining whether relief should beordered.

Transfer of Tax Attributes From theIndividual Debtor to theBankruptcy Estate

The bankruptcy estate succeeds to thefollowing tax attributes of the individualdebtor:

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 taxableincome of the bankruptcy estate generallyis figured in the same manner as anindividual. The gross income of thebankruptcy estate includes any incomeincluded in property of the estate asdefined in Bankruptcy Code section 541.

Also included is gain from the sale ofproperty. To figure gain, the trustee ordebtor-in-possession must determine thecorrect basis of the property.

To determine whether any amount paidor incurred by the bankruptcy estate isallowable as a deduction or credit, or istreated as wages for employment taxpurposes, treat the amount as if it werepaid or incurred by the individual debtorin the same trade or business or otheractivity the debtor engaged in before thebankruptcy proceedings began.Administrative expenses. Thebankruptcy estate is allowed a deductionfor any administrative expense allowed

under section 503 of title 11 of the U.S.Code, and any fee or charge assessedunder chapter 123 of title 28 of the U.S.Code, to the extent not disallowed underan Internal Revenue Code provision (e.g.,section 263, 265, or 275).Administrative expense loss. Whenfiguring a net operating loss, nonbusinessdeductions (including administrativeexpenses) are limited under section172(d)(4) to the bankruptcy estate'snonbusiness income. The excessnonbusiness deductions are anadministrative expense loss that may becarried back to each of the 3 precedingtax years and forward to each of the 7succeeding tax years of the bankruptcyestate. The amount of an administrativeexpense loss that may be carried to anytax year is determined after the netoperating loss deductions allowed for thatyear. An administrative expense loss isallowed only to the bankruptcy estate andcannot be carried to any tax year of theindividual debtor.Carryback of net operating losses andcredits. If the bankruptcy estate itselfincurs a net operating loss (apart fromlosses carried forward to the estate fromthe individual debtor), it can carry back itsnet operating losses not only to previous

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tax years of the bankruptcy estate, butalso to tax years of the individual debtorprior to the year in which the bankruptcyproceedings began. Excess credits, suchas the foreign tax credit, also may becarried back to pre-bankruptcy years ofthe individual debtor.Exemption. For tax years beginning in1999, a bankruptcy estate is allowed apersonal exemption of $2,750.Standard deduction. For tax yearsbeginning in 1999, a bankruptcy estate

that does not itemize deductions isallowed a standard deduction of $3,600.Discharge of indebtedness. In a title11 case, gross income does not includeamounts that normally would be includedin gross income resulting from thedischarge of indebtedness. However, anyamounts excluded from gross incomemust be applied to reduce certain taxattributes in a certain order. Attach Form982, Reduction of Tax Attributes Due toDischarge of Indebtedness, to show thereduction of tax attributes.

Tax Rate Schedule

Figure the tax for the bankruptcy estateusing the tax rate schedule below. Enterthe tax on Form 1040, line 40.

Prompt Determination of TaxLiability

To request a prompt determination of thetax liability of the bankruptcy estate, thetrustee or debtor-in-possession must file

a written application for the determinationwith the IRS District Director for thedistrict in which the bankruptcy case ispending. The application must besubmitted in duplicate and executedunder the penalties of perjury. Thetrustee or debtor-in-possession mustsubmit with the application an exact copyof the return (or returns) filed by thetrustee with the IRS for a completed taxperiod, and a statement of the name andlocation of the office where the return wasfiled. The envelope should be marked,Personal Attention of the SpecialProcedures Function (BankruptcySection). DO NOT OPEN IN

MAILROOM.The IRS will notify the trustee ordebtor-in-possession within 60 days fromreceipt of the application whether thereturn filed by the trustee ordebtor-in-possession has been selectedfor examination or has been accepted asfiled. If the return is selected forexamination, it will be examined as soonas possible. The IRS will notify the trusteeor debtor-in-possession of any tax duewithin 180 days from receipt of theapplication or within any additional timepermitted by the bankruptcy court.

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

Special Filing Instructions forBankruptcy Estates

Use Form 1041 only as a transmittal forForm 1040. In the top margin of Form1040 write Attachment to Form 1041. DONOT DETACH. Attach Form 1040 toForm 1041. Complete only theidentification area at the top of Form1041. Enter the name of the individualdebtor in the following format: John Q.

Public Bankruptcy Estate. Beneath, enterthe name of the trustee in the followingformat: Avery Snow, Trustee. In item D,enter the date the petition was filed or thedate of conversion to a chapter 7 or 11case.

Enter on Form 1041, line 23, the totaltax from line 56 of Form 1040. Completelines 24 through 29 of Form 1041, andsign and date it.

Specific Instructions

Name of Estate or TrustCopy the exact name of the estate or trustfrom the Form SS-4, Application forEmployer Identification Number, that youused to apply for the EIN.

If a grantor type trust (discussedbelow), write the name, identificationnumber, and address of the grantor(s) orother owner(s) in parentheses after thename of the trust.

AddressInclude the suite, room, or other unitnumber after the street address.

If the Post Office does not deliver mailto the street address and the fiduciary has

a P.O. box, show the box number insteadof the street address.

If you change your address after filingForm 1041, use Form 8822, Change ofAddress, to notify the IRS.

A. Type of EntityCheck the appropriate box that describesthe entity for which you are filing thereturn.Note: There are special filingrequirements for grantor type trusts andbankruptcy estates (discussed below).

Decedent's Estate

An estate of a deceased person is ataxable entity separate from the decedent.It generally continues to exist until thefinal distribution of the assets of the estateis made to the heirs and otherbeneficiaries. The income earned fromthe property of the estate during theperiod of administration or settlementmust be accounted for and reported bythe 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 notprovide that any amounts are to be paid,permanently set aside, or used forcharitable purposes; and

3. The trust does not distributeamounts allocated to the corpus of thetrust.

Complex Trust

A complex trust is any trust that does notqualify as a simple trust as explainedabove.

Grantor Type TrustA grantor type trust is a legal trust underapplicable state law that is not recognizedas a separate taxable entity for incometax purposes because the grantor or othersubstantial owners have not relinquishedcomplete dominion and control over thetrust.

Generally, for transfers made in trustafter March 1, 1986, the grantor is treatedas the owner of any portion of a trust inwhich he or she has a reversionaryinterest in either the income or corpustherefrom, if, as of the inception of thatportion of the trust, the value of thereversionary interest is more than 5% ofthe value of that portion. Also, the grantoris treated as holding any power or interestthat was held by either the grantor'sspouse at the time that the power orinterest was created or who became thegrantor's spouse after the creation of thatpower or interest.

CAUTION

!The following instructions applyonlyto grantor type trusts that arenot using an optional filing method,

explained later.Report on Form 1041 only the part of

the income that is taxable to the trust. Donot report on Form 1041 the income thatis taxable to the grantor or anotherperson. Instead, attach a separate sheetto report:q The income of the trust that is taxableto the grantor or another person undersections 671 through 678;q The name, identifying number, andaddress of the person(s) to whom theincome is taxable; andq Any deductions or credits applied to thisincome.

The income taxable to the grantor oranother person under sections 671through 678 and the deductions andcredits applied to the income must bereported by that person on his or her ownincome tax return.

Mortgage pools. The trustee of amortgage pool, such as the FederalNational Mortgage Association, collectsprincipal and interest payments on eachmortgage and makes distributions to thecertificate holders. Each pool isconsidered a grantor type trust, and eachcertificate holder is treated as the ownerof an undivided interest in the entire trustunder the grantor trust rules. Certificateholders must report their proportionateshare of the mortgage interest and otheritems of income on their individual taxreturns.

If taxable incomeis:

OverBut notover

The tax is:Of the

amountover

$0 $21,525 15% $021,525 52,025 $3,228.75 + 28% 21,52552,025 79,275 11,768.75 + 31% 52,02579,275 141,575 20,216.25 + 36% 79,275

141,575 ------ 42,644.25 + 39.6% 141,575

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Pre-need funeral trusts. Thepurchasers of pre-need funeral servicesare the grantors and the owners ofpre-need funeral trusts established understate laws. See Rev. Rul. 87-127, 1987-2C.B. 156. However, the trustees ofpre-need funeral trusts can elect to file thereturn and pay the tax for qualified funeraltrusts. For more information, see Form1041-QFT, U.S. Income Tax Return forQualified Funeral Trusts.Nonqualified deferred compensation

plans. Taxpayers may adopt andmaintain grantor trusts in connection withnonqualified 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 inrabbi trust arrangements. The procedurealso provides guidance for requestingrulings on the plans that use these trusts.

Optional Filing Methods for CertainGrantor Type Trusts

Generally, for a trust all of which is treatedas owned by one or more grantors orother persons, the trustee may use oneof the following three optional methods toreport instead of filing Form 1041.

Method 1. For a trust treated as ownedby one grantor or by one other person, thetrustee must give all payers of incomeduring the tax year the name andtaxpayer identification number (TIN) of thegrantor or other person treated as theowner of the trust and the address of thetrust. This method may be used only if theowner of the trust provides the trusteewith a signed Form W-9, Request forTaxpayer Identification Number andCertification. In addition, unless thegrantor or other person treated as ownerof the trust is the trustee or a co-trusteeof the trust, the trustee must give thegrantor or other person treated as owner

of the trust a statement that:q Shows all items of income, deduction,and credit of the trust;q Identifies the payer of each item ofincome;q Explains how the grantor or otherperson treated as owner of the trust takesthose items into account when figuring thegrantor's or other person's taxable incomeor tax; andq Informs the grantor or other persontreated as the owner of the trust thatthose items must be included whenfiguring taxable income and credits on hisor her income tax return.Important: Grantor trusts that have not

applied for an EIN and are going to fileunderMethod 1 do not need an EIN forthe trust as long as they continue to reportunder that method.

Method 2. For a trust treated as ownedby one grantor or by one other person, thetrustee must give all payers of incomeduring the tax year the name, address,and TIN of the trust. The trustee alsomust file with the IRS the appropriateForms 1099 to report the income or grossproceeds paid to the trust during the taxyear that shows the trust as the payer and

the grantor or other person treated asowner as the payee. The trustee mustreport each type of income in theaggregate and each item of grossproceeds separately. The due date forany Forms 1099 required to be filed withthe IRS by a trustee under this method isFebruary 28, 2000 (March 31, 2000, iffiled electronically).

In addition, unless the grantor or otherperson treated as owner of the trust is thetrustee or a co-trustee of the trust, the

trustee must give the grantor or otherperson treated as owner of the trust astatement that:q Shows all items of income, deduction,and credit of the trust;q Explains how the grantor or otherperson treated as owner of the trust takesthose items into account when figuring thegrantor's or other person's taxable incomeor tax; andq Informs the grantor or other persontreated as the owner of the trust thatthose items must be included whenfiguring taxable income and credits on hisor her income tax return. This statementsatisfies the requirement to give therecipient copies of the Forms 1099 filedby the trustee.

Method 3. For a trust treated as ownedby two or more grantors or other persons,the trustee must give all payers of incomeduring the tax year the name, address,and TIN of the trust. The trustee alsomust file with the IRS the appropriateForms 1099 to report the income or grossproceeds paid to the trust by all payersduring the tax year attributable to the partof the trust treated as owned by eachgrantor or other person, showing the trustas the payer and each grantor or otherperson treated as owner of the trust asthe payee. The trustee must report eachtype of income in the aggregate and each

item of gross proceeds separately. Thedue date for any Forms 1099 required tobe filed with the IRS by a trustee underthis method is February 28, 2000 (March31, 2000, if filed electronically).

In addition, the trustee must give eachgrantor or other person treated as ownerof the trust a statement that:q Shows all items of income, deduction,and credit of the trust attributable to thepart of the trust treated as owned by thegrantor or other person;q Explains how the grantor or otherperson treated as owner of the trust takesthose items into account when figuring thegrantor's or other person's taxable income

or tax; andq Informs the grantor or other persontreated as the owner of the trust thatthose items must be included whenfiguring taxable income and credits on hisor her income tax return. This statementsatisfies the requirement to give therecipient copies of the Forms 1099 filedby the trustee.Exceptions. The following trusts cannotreport using the optional filing methods:

1. A common trust fund (as defined insection 584(a)).

2. A foreign trust or a trust that hasany of its assets located outside theUnited States.

3. A qualified subchapter S trust (asdefined in section 1361(d)(3)).

4. A trust all of which is treated asowned by one grantor or one other personwhose tax year is other than a calendaryear.

5. A trust all of which is treated asowned by one or more grantors or otherpersons, 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 otherpersons if at least one grantor or otherperson is an exempt recipient forinformation reporting purposes, unless atleast one grantor or other person is notan exempt recipient and the trusteereports without treating any of thegrantors or other persons as exemptrecipients.Changing filing methods. A trustee whopreviously had filed Form 1041 canchange to one of the optional methods byfiling a final Form 1041 for the tax yearthat immediately precedes the first tax

year for which the trustee elects to reportunder one of the optional methods. On thefront of the final Form 1041, the trusteemust write Pursuant to section1.671-4(g), this is the final Form 1041 forthis grantor trust, and check the Finalreturn box in item F.

For more details on changing reportingmethods, including changes from oneoptional method to another, seeRegulations section 1.671-4(g).Backup withholding. Generally, agrantor trust is considered a payor ofreportable payments received by the trustfor purposes of backup withholding. If thetrust has 10 or fewer grantors, areportable payment made to the trust istreated as a reportable payment of thesame kind made to the grantors on thedate the trust received the payment. If thetrust has more than 10 grantors, areportable payment made to the trust istreated as a payment of the same kindmade by the trust to each grantor in anamount equal to the distribution made toeach grantor on the date the grantor ispaid or credited. The trustee mustwithhold 31% of reportable paymentsmade to any grantor who is subject tobackup withholding. For more information,see section 3406 and TemporaryRegulations section 35a.9999-2, Q&A 20.

Bankruptcy Estate

A chapter 7 or 11 bankruptcy estate is aseparate and distinct taxable entity fromthe individual debtor for Federal incometax purposes. See Of Special Interest toBankruptcy Trustees andDebtors-in-Possession on page 7.

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

Pooled Income Fund

A pooled income fund is a split-interesttrust with a remainder interest for a publiccharity and a life income interest retained

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by the donor or for another person. Theproperty is held in a pool with otherpooled income fund property and does notinclude any tax-exempt securities. Theincome for a retained life interest isfigured using the yearly rate of returnearned by the trust. See section 642(c)and the related regulations for moreinformation.

If you are filing for a pooled incomefund, attach a statement to support thefollowing:q

The calculation of the yearly rate ofreturn.q The computation of the deduction fordistributions to the beneficiaries.q The computation of any charitablededuction.

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

If the fund has accumulations ofincome, file Form 1041-A unless the fundis required to distribute all of its netincome to beneficiaries currently.

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

B. Number of Schedules K-1AttachedEvery trust or decedent's estate claimingan income distribution deduction on page1, line 18, must enter the number ofSchedules K-1 (Form 1041) that areattached to Form 1041.

C. Employer IdentificationNumberEvery estate or trust that is required to fileForm 1041 must have an EIN. To applyfor one, use Form SS-4. Form SS-4 hasinformation on how to apply for an EIN bymail or by telephone. If the estate or trusthas not received its EIN by the time thereturn is due, write Applied for in thespace for the EIN. See Pub. 583, Startinga Business and Keeping Records, formore information.

If you are filing a return for a mortgagepool, such as one created under themortgage-backed security programsadministered by the Federal NationalMortgage Association (Fannie Mae) orthe Government National MortgageAssociation (Ginnie Mae), the EIN stayswith the pool if that pool is traded fromone financial institution to another.

D. Date Entity CreatedEnter the date the trust was created, or,if a decedent's estate, the date of thedecedent's death.

E. Nonexempt Charitable andSplit-Interest Trusts

Section 4947(a)(1) Trust

Check this box if the trust is a nonexemptcharitable trust within the meaning ofsection 4947(a)(1). A nonexemptcharitable trust is a trust that is notexempt from tax under section 501(a); all

of the unexpired interests are devoted toone or more charitable purposesdescribed in section 170(c)(2)(B); and forwhich a deduction was allowed undersection 170 (for individual taxpayers) orsimilar Code section for personal holdingcompanies, foreign personal holdingcompanies, or estates or trusts (includinga deduction for estate or gift taxpurposes).

Not a Private Foundation

Check this box if the charitable trust is nottreated as a private foundation undersection 509. For more information, seeRegulations section 53.4947-1.

If a nonexempt charitable trust is nottreated as though it were a privatefoundation, the fiduciary must file, inaddition to Form 1041, Form 990 (orForm 990-EZ), Return of OrganizationExempt From Income Tax, and ScheduleA (Form 990), Organization ExemptUnder Section 501(c)(3), if the trust'sgross receipts are normally more than$25,000.

If a nonexempt charitable trust is nottreated as though it were a privatefoundation, and it has no taxable incomeunder Subtitle A, it can file either Form990 or Form 990-EZ instead of Form 1041to meet its section 6012 filingrequirement.

Section 4947(a)(2) Trust

Check this box if the trust is a split-interesttrust described in section 4947(a)(2). Asplit-interest trust is a trust that is notexempt from tax under section 501(a);has some unexpired interests that aredevoted to purposes other than religious,charitable, or similar purposes describedin section 170(c)(2)(B); and has amountstransferred in trust after May 26, 1969, forwhich a deduction was allowed under

section 170 (for individual taxpayers) orsimilar Code section for personal holdingcompanies, foreign personal holdingcompanies, or estates or trusts (includinga deduction for estate or gift taxpurposes).

The fiduciary of a split-interest trustmust also file Form 5227 (for amountstransferred in trust after May 26, 1969);and Form 1041-A if the trust's governinginstrument does not require that all of thetrust's income be distributed currently.

If a split-interest trust has any unrelatedbusiness taxable income, however, itmust file Form 1041 to report all of itsincome and to pay any tax due.

Nonexempt Charitable TrustTreated as a Private Foundation

If a nonexempt charitable trust is treatedas though it were a private foundationunder section 509, then the fiduciary mustfile Form 990-PF, Return of PrivateFoundation, in addition to Form 1041.

If a nonexempt charitable trust issubject to any of the private foundationexcise taxes, then it must also file Form4720, Return of Certain Excise Taxes onCharities and Other Persons UnderChapters 41 and 42 of the Internal

Revenue Code. None of the privatefoundation taxes paid by the trust can betaken as a deduction on Form 1041.

If a nonexempt charitable trust istreated as though it were a privatefoundation, and it has no taxable incomeunder Subtitle A, it may file Form 990-PFinstead of Form 1041 to meet its section6012 filing requirement.

F. Initial Return, AmendedReturn, Final Return; orChange in Fiduciary's Nameor Address

Amended Return

If you are filing an amended Form 1041,check the Amended return box.Complete the entire return, correct theappropriate lines with the newinformation, and refigure the estate's ortrust's tax liability. If the total tax on line23 is larger on the amended return thanon the original return, you generallyshould pay the difference with theamended return. However, you shouldadjust this amount if there is any increase

or decrease in the total payments shownon line 25.On an attached sheet explain the

reason for the amendments and identifythe lines and amounts being changed onthe amended return.

If the amended return results in achange to income, or a change indistribution of any income or otherinformation provided to a beneficiary, anamended Schedule K-1 (Form 1041) mustalso be filed with the amended Form 1041and given to each beneficiary. Check theAmended K-1 box at the top of theamended Schedule K-1.

Final Return

Check this box if this is a final returnbecause the estate or trust hasterminated. Also, check the Final K-1box at the top of Schedule K-1.

If, on the final return, there are excessdeductions, an unused capital losscarryover, or a net operating losscarryover, see the instructions forSchedule K-1, lines 13a through 13e, onpage 32.

G. Pooled Mortgage AccountIf you bought a pooled mortgage accountduring the year, and still have that poolat the end of the tax year, check the

Bought box and enter the date ofpurchase. If you sold a pooled mortgageaccount that was purchased during this,or a previous, tax year, check the Soldbox and enter the date of sale. If youneither bought nor sold a pooledmortgage account, skip this item.

Income

Special Rule for Blind Trust

If you are reporting income from aqualified blind trust (under the Ethics inGovernment Act of 1978), do not identify

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the payer of any income to the trust butcomplete the rest of the return asprovided in the instructions. Also writeBlind Trust at the top of page 1.

Line 1Interest Income

Report the estate's or trust's share of alltaxable interest income that was receivedduring the tax year. Examples of taxableinterest include interest from:q Accounts (including certificates ofdeposit and money market accounts) with

banks, credit unions, and thrifts.q Notes, loans, and mortgages.q U.S. Treasury bills, notes, and bonds.q U.S. savings bonds.q Original issue discount.q Income received as a regular interestholder of a real estate mortgageinvestment conduit (REMIC).

For taxable bonds acquired after 1987,amortizable bond premium is treated asan offset to the interest income insteadof as a separate interest deduction. SeePub. 550.

For the year of the decedent's death,Forms 1099-INT issued in the decedent'sname may include interest income earned

after the date of death that should bereported on the income tax return of thedecedent's estate. When preparing thedecedent's final income tax return, reporton line 1 of Schedule B (Form 1040) orSchedule 1 (Form 1040A) the totalinterest shown on Form 1099-INT. Underthe last entry on line 1, subtotal all theinterest reported on line 1. Below thesubtotal, write Form 1041 and the nameand address shown on Form 1041 for thedecedent's estate. Also, show the part ofthe interest reported on Form 1041 andsubtract it from the subtotal.

Line 2Ordinary Dividends

Report the estate's or trust's share of allordinary dividends received during the taxyear.

For the year of the decedent's death,Forms 1099-DIV issued in the decedent'sname may include dividends earned afterthe date of death that should be reportedon the income tax return of the decedent'sestate. When preparing the decedent'sfinal income tax return, report on line 5 ofSchedule B (Form 1040) or Schedule 1(Form 1040A) the ordinary dividendsshown on Form 1099-DIV. Under the lastentry on line 5, subtotal all the dividendsreported on line 5. Below the subtotal,write Form 1041 and the name andaddress shown on Form 1041 for the

decedent's estate. Also, show the part ofthe ordinary dividends reported on Form1041 and subtract it from the subtotal.Note: Report capital gain distributions onSchedule D (Form 1041), line 9.

Line 3Business Income or (Loss)

If the estate or trust operated a business,report the income and expenses onSchedule C (Form 1040), Profit or LossFrom Business (or Schedule C-EZ (Form1040), Net Profit From Business). Enterthe net profit or (loss) from Schedule C (orSchedule C-EZ) on line 3.

Line 4Capital Gain or (Loss)

Enter the gain from Schedule D (Form1041), Part III, line 16, column (3); or theloss from Part IV, line 17.

CAUTION

!Do notsubstitute Schedule D(Form 1040) for Schedule D (Form1041).

Line 5Rents, Royalties,Partnerships, Other Estates andTrusts, etc.

Use Schedule E (Form 1040),Supplemental Income and Loss, to reportthe estate's or trust's share of income or(losses) from rents, royalties,partnerships, S corporations, otherestates and trusts, and REMICs. Enter thenet profit or (loss) from Schedule E on line5. See the instructions for Schedule E(Form 1040) for reporting requirements.

If the estate or trust received aSchedule K-1 from a partnership, Scorporation, or other flow-through entity,use the corresponding lines on Form 1041to report the interest, dividends, capitalgains, etc., from the flow-through entity.

Line 6Farm Income or (Loss)

If the estate or trust operated a farm, useSchedule F (Form 1040), Profit or LossFrom Farming, to report farm income andexpenses. Enter the net profit or (loss)from Schedule F on line 6.

Line 7Ordinary Gain or (Loss)

Enter from line 18, Form 4797, Sales ofBusiness Property, the ordinary gain orloss from the sale or exchange of propertyother than capital assets and also frominvoluntary conversions (other thancasualty or theft).

Line 8Other Income

Enter other items of income not included

on lines 1 through 7. List the type andamount on an attached schedule if theestate or trust has more than one item.

Items to be reported on line 8 include:q Unpaid compensation received by thedecedent's estate that is income inrespect of a decedent.q Any part of a total distribution shownon Form 1099-R, Distributions FromPensions, Annuities, Retirement orProfit-Sharing Plans, IRAs, InsuranceContracts, etc., that is treated as ordinaryincome. For more information, see theseparate instructions for Form 4972, Taxon Lump-Sum Distributions.

Deductions

Depreciation, Depletion, andAmortization

A trust or decedent's estate is allowed adeduction for depreciation, depletion, andamortization only to the extent thedeductions are not apportioned to thebeneficiaries. An estate or trust is notallowed to make an election under section179 to expense certain tangible property.

The estate's or trust's share ofdepreciation, depletion, and amortizationshould be reported on the appropriatelines of Schedule C (or C-EZ), E, or F(Form 1040), the net income or loss fromwhich is shown on line 3, 5, or 6 of Form1041. If the deduction is not related to aspecific business or activity, then report iton line 15a.Depreciation. For a decedent's estate,the depreciation deduction is apportionedbetween the estate and the heirs,

legatees, and devisees on the basis of theestate's income allocable to each.For a trust, the depreciation deduction

is apportioned between the incomebeneficiaries and the trust on the basis ofthe trust income allocable to each, unlessthe governing instrument (or local law)requires or permits the trustee to maintaina depreciation reserve. If the trustee isrequired to maintain a reserve, thededuction is first allocated to the trust, upto the amount of the reserve. Any excessis allocated among the beneficiaries in thesame manner as the trust's accountingincome. See Regulations section1.167(h)-1(b).Depletion. For mineral or timber propertyheld by a decedent's estate, the depletiondeduction is apportioned between theestate and the heirs, legatees, anddevisees on the basis of the estate'sincome from such property allocable toeach.

For mineral or timber property held intrust, the depletion deduction isapportioned between the incomebeneficiaries and the trust based on thetrust income from such property allocableto each, unless the governing instrument(or local law) requires or permits thetrustee to maintain a reserve for depletion.If the trustee is required to maintain areserve, the deduction is first allocated to

the trust, up to the amount of the reserve.Any excess is allocated among thebeneficiaries in the same manner as thetrust's accounting income. SeeRegulations section 1.611-1(c)(4).Amortization. The deduction foramortization is apportioned between anestate or trust and its beneficiaries underthe same principles for apportioning thedeductions for depreciation and depletion.

The deduction for the amortization ofreforestation expenditures under section194 is allowed only to an estate.

Allocation of Deductions forTax-Exempt Income

Generally, no deduction that wouldotherwise be allowable is allowed for anyexpense (whether for business or for theproduction of income) that is allocable totax-exempt income. Examples oftax-exempt income include:q Certain death benefits (section 101);q Interest on state or local bonds (section103);q Compensation for injuries or sickness(section 104); andq Income from discharge of indebtednessin a title 11 case (section 108).

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Exception. State income taxes andbusiness expenses that are allocable totax-exempt interest are deductible.

Expenses that are directly allocable totax-exempt income are allocated only totax-exempt income. A reasonableproportion of expenses indirectly allocableto both tax-exempt income and otherincome must be allocated to each classof income.

Deductions That May Be Allowable

for Estate Tax PurposesAdministration expenses and casualtyand theft losses deductible on Form 706may be deducted, to the extent otherwisedeductible for income tax purposes, onForm 1041 if the fiduciary files astatement waiving the right to deduct theexpenses and losses on Form 706. Thestatement must be filed before theexpiration of the statutory period oflimitations for the tax year the deductionis claimed. See Pub. 559 for moreinformation.

Accrued Expenses

Generally, an accrual basis taxpayer candeduct accrued expenses in the tax yearthat: (a) all events have occurred thatdetermine the liability; and (b) the amountof the liability can be figured withreasonable accuracy. However, all theevents that establish liability are treatedas occurring only when economicperformance takes place. There areexceptions for recurring items. Seesection 461(h).

Limitations on Deductions

At-Risk Loss Limitations

Generally, the amount the estate or trusthas at risk limits the loss it can deductfor any tax year. Use Form 6198, At-RiskLimitations, to figure the deductible lossfor the year and file it with Form 1041. Formore information, see Pub. 925, PassiveActivity and At-Risk Rules.

Passive Activity Loss and CreditLimitations

In general. Section 469 and theregulations thereunder generally limitlosses from passive activities to theamount of income derived from all passiveactivities. Similarly, credits from passiveactivities are generally limited to the taxattributable to such activities. Theselimitations are first applied at the estateor trust level.

Generally, an activity is a passiveactivity if it involves the conduct of anytrade or business, and the taxpayer doesnot materially participate in the activity.Passive activities do not include workinginterests in oil and gas properties. Seesection 469(c)(3).Note: Material participation standards forestates and trusts had not beenestablished by regulations at the timethese instructions went to print.

For a grantor trust, materialparticipation is determined at the grantorlevel.

If the estate or trust distributes aninterest in a passive activity, the basis ofthe property immediately before thedistribution is increased by the passiveactivity losses allocable to the interest,and such losses cannot be deducted.See section 469(j)(12).Note: Losses from passive activities arefirst subject to the at-risk rules. When thelosses are deductible under the at-riskrules, the passive activity rules then apply.Rental activities. Generally, rental

activities are passive activities, whetheror not the taxpayer materially participates.However, certain taxpayers whomaterially participate in real propertytrades or businesses are not subject tothe passive activity limitations on lossesfrom rental real estate activities in whichthey materially participate. For moredetails, see section 469(c)(7).

For tax years of an estate ending lessthan 2 years after the decedent's date ofdeath, up to $25,000 of deductions anddeduction equivalents of credits fromrental real estate activities in which thedecedent actively participated areallowed. Any excess losses and/or creditsare suspended for the year and carriedforward.Portfolio income. Portfolio income is nottreated as income from a passive activity,and passive losses and credits generallymay not be applied to offset it. Portfolioincome generally includes interest,dividends, royalties, and income fromannuities. Portfolio income of an estateor trust must be accounted for separately.Forms to file. See Form 8582, PassiveActivity Loss Limitations, to figure theamount of losses allowed from passiveactivities. See Form 8582-CR, PassiveActivity Credit Limitations, to figure theamount of credit allowed for the currentyear.

Transactions Between RelatedTaxpayers

Under section 267, a trust that uses theaccrual method of accounting may onlydeduct business expenses and interestowed to a related party in the year thepayment is included in the income of therelated party. For this purpose, a relatedparty includes:

1. A grantor and a fiduciary of anytrust;

2. A fiduciary of a trust and a fiduciaryof another trust, if the same person is agrantor of both trusts;

3. A fiduciary of a trust and a

beneficiary of such trust;4. A fiduciary of a trust and a

beneficiary of another trust, if the sameperson is a grantor of both trusts;

5. A fiduciary of a trust and acorporation more than 50% in value of theoutstanding stock of which is owned,directly or indirectly, by or for the trust orby or for a person who is a grantor of thetrust; and

6. An executor of an estate and abeneficiary of that estate, except for asale or exchange to satisfy a pecuniary

bequest (i.e., a bequest of a sum ofmoney).

Line 10Interest

Enter the amount of interest (subject tolimitations) paid or incurred by the estateor trust on amounts borrowed by theestate or trust, or on debt acquired by theestate or trust (e.g., outstandingobligations from the decedent) that is notclaimed elsewhere on the return.

If the proceeds of a loan were used for

more than one purpose (e.g., to purchasea portfolio investment and to acquire aninterest in a passive activity), the fiduciarymust make an interest allocationaccording to the rules in TemporaryRegulations section 1.163-8T.

Do not include interest paid onindebtedness incurred or continued topurchase or carry obligations on which theinterest is wholly exempt from income tax.

Personal interest is not deductible.Examples of personal interest includeinterest paid on:q Revolving charge accounts used topurchase personal use property.q Personal notes for money borrowed

from a bank, credit union, or other person.q Installment loans on personal useproperty.q Underpayments of Federal, state, orlocal income taxes.

Interest that is paid or incurred onindebtedness allocable to a trade orbusiness (including a rental activity)should be deducted on the appropriateline of Schedule C (or C-EZ), E, or F(Form 1040), the net income or loss fromwhich is shown on line 3, 5, or 6 of Form1041.

Types of interest to include on line 10are:

1. Any investment interest (subject to

limitationssee below);2. Any qualified residence interest(see page 13); and

3. Any interest payable under section6601 on any unpaid portion of the estatetax attributable to the value of areversionary or remainder interest inproperty for the period during which anextension of time for payment of such taxis in effect.Investment interest. Generally,investment interest is interest (includingamortizable bond premium on taxablebonds acquired after October 22, 1986,but before January 1, 1988) that is paidor incurred on indebtedness that is

properly allocable to property held forinvestment. Investment interest does notinclude any qualified residence interest,or interest that is taken into account undersection 469 in figuring income or loss froma passive activity.

Generally, net investment income is theexcess of investment income overinvestment expenses. Investmentexpenses are those expenses (other thaninterest) allowable after application of the2% floor on miscellaneous itemizeddeductions.

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The amount of the investment interestdeduction may be limited. Use Form4952, Investment Interest ExpenseDeduction, to figure the allowableinvestment interest deduction.

If you must complete Form 4952, checkthe box on line 10 and attach Form 4952.Then, add the deductible investmentinterest to the other types of deductibleinterest and enter the total on line 10.Qualified residence interest. Interestpaid or incurred by an estate or trust on

indebtedness secured by a qualifiedresidence of a beneficiary of an estate ortrust is treated as qualified residenceinterest if the residence would be aqualified residence (i.e., the principalresidence or the second residenceselected by the beneficiary) if owned bythe beneficiary. The beneficiary musthave a present interest in the estate ortrust or an interest in the residuary of theestate or trust. See Pub. 936, HomeMortgage Interest Deduction, for anexplanation of the general rules fordeducting home mortgage interest.

See section 163(h)(3) for a definitionof qualified residence interest and forlimitations on indebtedness.

Line 11Taxes

Enter any deductible taxes paid orincurred during the tax year that are notdeductible elsewhere on Form 1041.

Deductible taxes include:q State and local income or real propertytaxes.q The generation-skipping transfer (GST)tax imposed on income distributions.

Do no

us internal revenue service: i1041--1999

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