us internal revenue service: i1041--2000

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2000 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 36.

Changes To Noteq The estate or trust may need to mail itsreturn to a different service center thisyear because the IRS has changed thefiling location for several areas. Also, we

now have two different ZIP codes for eachservice center. One Zip code is used ifyou enclose a check or money order withthe return and the other is used if nocheck or money order is enclosed with thereturn. See Where To File on the backpage of these instructions.q The FSC Repeal and ExtraterritorialIncome Exclusion Act of 2000 allows anew extraterritorial income exclusion fortransactions after September 30, 2000.The exclusion is based on an estate's ortrust's qualifying foreign trade income. Formore details and to figure the amount ofthe exclusion, see new Form 8873,Extraterritorial Income Exclusion.q

For tax years beginning in 2000, therequirement to file a return for abankruptcy estate applies only if grossincome is at least $6,475.q For tax years beginning in 2001, theestimated tax safe harbor that is basedon the tax shown on the prior year taxreturn is increased to 110% of thatamount if the adjusted gross income onthat return is more than $150,000 andless than 2/3 of gross income for 2000 or2001 is from farming or fishing.q Fiscal year estates and trusts may electto recognize gain on certain assets held

Contents Page

Schedule BIncome DistributionDeduction . . . . . . . . . . . . . 17

Schedule GTax Computation . . . 18

Other Information . . . . . . . . . . 19

Schedule IAlternative Minimum Tax 20

Schedule D (Form 1041)CapitalGains and Losses . . . . . . . . . 25

Schedule J (Form 1041)Accumulation Distribution forCertain Complex Trusts . . . . . . 30

Form 1041 Schedule D Schedule J Schedule K-1Schedule K-1 (Form 1041)

Beneficiary's Share of Income,Deductions, Credits, etc. . . . . . 32

Recordkeeping 46 hr., 37 min. 29 hr., 53 min. 39 hr. , 27 min. 8 hr ., 51 min.Learning about the law or the form 18 hr., 30 min. 2 hr., 23 min. 1 hr., 17 min. 1 hr., 17 min.Preparing the form 34 hr., 58 min. 2 hr., 57 min. 1 hr., 59 min. 1 hr., 29 min.Copying, assembling, and sendingthe form to the IRS 4 hr., 17 min. Index . . . . . . . . . . . . . . . . 35

Where To File . . . . . . . . . . . . 36

Contents PageContents PageOther Forms That May Be Required 7Changes To Note . . . . . . . . . . 1Assembly and Attachments . . . . . 8Photographs of Missing Children . . 2Additional Information . . . . . . . . 8Unresolved Tax Problems . . . . . 2Of Special Interest to Bankruptcy

Trustees and Debtors-in-Possession . . . . . . . . . . . 8

How To Get Forms and Publications 2

General Instructions . . . . . . . . 2

Purpose of Form . . . . . . . . . . 2Specific Instructions . . . . . . . 10

Income Taxation of Trusts andDecedents' Estates . . . . . . . . 2

Name of Estate or Trust . . . . . . 10

Address . . . . . . . . . . . . . . 10Abusive Trust Arrangements . . . . 2

Type of Entity . . . . . . . . . . . 10Definitions . . . . . . . . . . . . . . 3

Number of Schedules K-1 Attached 10Who Must File . . . . . . . . . . . 3

Employer Identification Number . . . 10Special Filing Instructions for Grantor

Type Trusts and Pooled IncomeFunds . . . . . . . . . . . . . . . 4Date Entity Created . . . . . . . . . 10

Nonexempt Charitable andSplit-Interest Trusts . . . . . . . . 10Electronic and Magnetic Media Filing 5

Initial Return, Amended Return, FinalReturn; or Change in Fiduciary'sName or Address . . . . . . . . . 11

When To File . . . . . . . . . . . . 6

Period Covered . . . . . . . . . . . 6

Who Must Sign . . . . . . . . . . . 6Pooled Mortgage Account . . . . . 11

Accounting Methods . . . . . . . . 6Income . . . . . . . . . . . . . . . 11

Accounting Periods . . . . . . . . . 6Deductions . . . . . . . . . . . . . 12

Rounding Off to Whole Dollars . . . 6Tax and Payments . . . . . . . . . 15

Estimated Tax . . . . . . . . . . . 6Schedule ACharitable Deduction . 16

Interest and Penalties . . . . . . . . 7

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on January 1, 2001. The election allowsfuture gain on the assets to be eligible fora lower capital gain tax rate. See ElectionTo Recognize Gain on Assets Held onJanuary 1, 2001, on page 25.

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 IssuesIf you have attempted to deal with an IRSproblem unsuccessfully, you shouldcontact the Taxpayer Advocate. TheTaxpayer Advocate independentlyrepresents the estate's or trust's interestsand concerns within the IRS by protectingits rights and resolving problems that have

not been fixed through normal channels.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.

The estate's or trust's assignedpersonal advocate will listen to its pointof view and will work with the estate ortrust to address its concerns. The estateor trust can expect the advocate toprovide:q A fresh look at a new or on-goingproblem.q Timely acknowlegment.q The name and phone number of theindividual assigned to its case.q Updates on progress.q Timeframes for action.q Speedy resolution.q Courteous service.

When contacting the TaxpayerAdvocate, you should provide thefollowing information:q The estate's or trust's name, address,and employer identification number.q The name and telephone number of anauthorized contact person and the hourshe or she can be reached.q The type of tax return and year(s)involved.q A detailed description of the problem.q Previous attempts to solve the problemand the office that had been contacted.q A description of the hardship the estateor trust is facing (if applicable).

The estate or trust may contact aTaxpayer Advocate by calling a toll-freenumber, 1-877-777-4778. Persons whohave access to TTY/TDD equipment maycall 1-800-829-4059 and ask for Taxpayer

Advocate assistance. If the estate or trustprefers, it may call, write, or fax theTaxpayer Advocate office in its area. SeePub. 1546, The Taxpayer AdvocateService of the IRS, for a list of addressesand fax numbers.

How To Get Forms andPublications

Personal Computer

You can access the IRS web site 24hours 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.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$21 (no handling fee) or call

1-877-CDFORMS (1-877-233-6767) tollfree to buy the CD-ROM for $21 (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 Instructions

Purpose of FormThe fiduciary of a domestic decedent's

estate, 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 orher death under a will (testamentary ). Ifthe trust instrument contains certain

provisions, then the person creating thetrust (the grantor ) is treated as the ownerof the trust's assets. Such a trust is agrantor type trust. See page 4 for specialrules for grantor trusts.

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 determines

the amount of any distributions taxed tothe beneficiaries.For this reason, a trust or decedent's

estate 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 incomedistribution 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. Thepromised 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 trustarrangements.

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

rental agreements, fees for services,purchase agreements, and distributions.Some of the abusive trust

arrangements that have been identifiedinclude unincorporated business trusts (ororganizations), equipment or servicetrusts, family residence trusts, charitabletrusts, and final trusts. In each of thesetrusts, 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 totransform 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.

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 incomeon 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 are

payable 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 timeof 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 Form1041 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 under

section 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 is

not 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 anexecutor, 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 estate

or 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.

TrustThe 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,2. Gross income of $600 or more

(regardless of taxable income), or3. A beneficiary who is a nonresident

alien.Two or more trusts are treated as one

trust if such trusts have substantially thesame grantor(s) and substantially thesame primary beneficiary(ies) and aprincipal purpose of such trusts is

avoidance of tax. This provision appliesonly to that portion of the trust that isattributable to contributions to corpusmade 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:

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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(1999-1 C.B. 631) for more informationon the court and control tests. See alsoNotice 96-65, 1996-2 C.B. 232, underwhich a trust (including a wholly-ownedgrantor trust) may amend the provisionsof the trust in order to meet the new

statutory requirements.A trust that is not a domestic trust is

treated 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 foreigntrust, 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 thedecedent'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 treated

under section 676 as having been ownedby the decedent whose estate is makingthe election, because of a power in thegrantor of the trust to revoke the trust. Forthis purpose, a power does not includeany power in the grantor that is treatedas held by the grantor because it is heldby his or her spouse.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 Form1041. The original statement must beattached to Form 1041 filed by the duedate (including extensions) for the estatefor its first tax year. If the original returnwas filed on time, you may make theelection on an amended return filed nolater than 6 months after the due date ofthe return (excluding extensions). WriteFiled pursuant to section 301.9100-2 at

the top of the amended return, and file itat the same address you used for theoriginal return.

If the revocable trust must file a Form1041 for the tax year ending after the dateof the decedent's death, you must attacha copy of the statement to that return.

See Rev. Proc. 98-13, I.R.B. 1998-4,21 (1998-1 C.B. 370) for details of whatyou must include in the statement and foradditional information on the election.

Bankruptcy EstateThe bankruptcy trustee or debtor-in-possession must file Form 1041 for theestate 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 $6,475 or more. See Of SpecialInterest To Bankruptcy Trustees andDebtors-in-Possession on page 8 fordetails.

Common Trust Funds

Do not file Form 1041 for a common trustfund maintained by a bank. Instead, thefund may use Form 1065, U.S. Return of

Partnership Income, for its return. Formore details, see section 584 andRegulations section 1.6032-1.

Qualified Settlement Funds

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

Special Filing Instructionsfor Grantor Type Trusts andPooled Income Funds

Grantor Type Trusts

A trust is a grantor trust if the grantorretains certain powers or ownershipbenefits. This can also apply to only aportion of a trust. See Grantor TypeTrusts on page 10 for details on whatmakes a trust a grantor trust.

In general, a grantor trust is ignored fortax purposes and all of the income,deductions, etc., are treated as belongingdirectly to the grantor. This also appliesto any portion of a trust that is treated asa grantor trust.

CAUTION

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

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

If the entire trust is a grantor trust, fill inonly the entity portion of Form 1041. Donot show any dollar amounts on the form,itself; show dollar amounts only on anattachment to the form. Do not useSchedule K-1 (Form 1041) as theattachment.

If only part of the trust is treated as agrantor trust, report on Form 1041 onlythe part of the income, deductions, etc.,that is taxable to the trust. The amounts

that are taxable directly to the grantor areshown only on an attachment to the form.Do not use Schedule K-1 (Form 1041)as the attachment.

On the attachment, report:q The name, identifying number, andaddress of the person(s) to whom theincome is taxable;q The income of the trust that is taxableto the grantor or another person undersections 671 through 678. Report theincome in the same detail as it would be

reported on the grantor's return had itbeen received directly by the grantor; andq Any deductions or credits that apply tothis income. Report these deductions andcredits in the same detail as they wouldbe reported on the grantor's return hadthey been received directly by the grantor.

The income taxable to the grantor oranother person under sections 671through 678 and the deductions andcredits that apply to that income must bereported by that person on their ownincome tax return.Example. The John Doe Trust is agrantor type trust. During the year, thetrust sold 100 shares of ABC stock for

$1,010 in which it had a basis of $10 and200 shares of XYZ stock for $10 in whichit had a $1,020 basis.

The trust does not report thesetransactions on Form 1041. Instead, aschedule is attached to the Form 1041showing each stock transactionseparately and in the same detail as JohnDoe (grantor and owner) will need toreport these transactions on his ScheduleD (Form 1040). The trust may not net thecapital gains and losses, nor may it issueJohn Doe a Schedule K-1 (Form 1041)showing a $10 long-term capital loss.

Optional Filing Methods for Certain

Grantor Type TrustsGenerally, if a trust is treated as ownedby one grantor or other person, thetrustee may choose Optional Method 1or Optional Method 2 as the trust'smethod of reporting instead of filing Form1041.

Generally, if a trust is treated as ownedby two or more grantors or otherpersons, the trustee may chooseOptional Method 3 as the trust's methodof reporting instead of filing Form 1041.

Once you choose the trust's filingmethod, you must follow the rules underChanging filing methods if you want tochange to another method.

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.

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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 asowned 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 the

grantors or other persons as exemptrecipients.Optional Method 1. For a trust treatedas owned by one grantor or by one otherperson, the trustee must give all payersof income during the tax year the nameand taxpayer identification number (TIN)of the grantor or other person treated asthe owner of the trust and the address ofthe trust. This method may be used onlyif the owner of the trust provides thetrustee with a signed Form W-9, Requestfor Taxpayer Identification Number andCertification. In addition, unless thegrantor or other person treated as ownerof the trust is the trustee or a co-trustee

of the trust, the trustee must give thegrantor or other person treated as ownerof 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 his

or her income tax return.

TIP

Grantor trusts that have not appliedfor an EIN and are going to fileunderOptional Method 1 do not

need an EIN for the trust as long as theycontinue to report under that method.Optional Method 2. For a trust treatedas owned by one grantor or by one otherperson, the trustee must give all payersof income during the tax year the name,address, and TIN of the trust. The trusteealso must 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 andthe 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, 2001 (April 2, 2001, if filedelectronically).

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

person 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 when

figuring 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.Optional Method 3. For a trust treatedas owned by two or more grantors orother persons, the trustee must give allpayers of income during the tax year thename, address, and TIN of the trust. Thetrustee also must file with the IRS theappropriate Forms 1099 to report theincome or gross proceeds paid to the trustby all payers during the tax yearattributable to the part of the trust treatedas owned by each grantor or other

person, showing the trust as the payerand each grantor or other person treatedas owner of the trust as the payee. Thetrustee must report each type of incomein the aggregate 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, 2001 (April 2, 2001, if filedelectronically).

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 the

grantor 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 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.Changing filing methods. A trustee whopreviously had filed Form 1041 can

change to one of the optional methods byfiling a final Form 1041 for the tax yearthat immediately precedes the first taxyear 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.

The trustee must withhold 31% ofreportable payments made to any grantorwho is subject to backup withholding.

If the trust 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 the trust has more than 10 grantors,a reportable 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.

For more information, see section 3406and Temporary Regulations section35a.9999-2, Q&A 20.

Pooled Income Funds

If you are filing for a pooled income fund,attach a statement to support thefollowing:q The calculation of the yearly rate of

return.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.

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, Form1041 for 2000, 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 filing

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of Form 1041, call the Magnetic MediaUnit at the Philadelphia Service Center at215-516-7533 (not a toll-free number), orwrite to:

Internal Revenue Service CenterAttention: ELF Processing SupportSection-DP 272011601 Roosevelt Blvd.Philadelphia, PA 19154

When To File

For calendar year estates and trusts, fileForm 1041 and Schedules K-1 on orbefore April 16, 2001. 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, 2001, must fileForm 1041 by October 15, 2001.

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, UPS

2nd 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 forAutomatic 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 befiled by the extended due date for Form1041.

Period CoveredFile the 2000 return for calendar year2000 and fiscal years beginning in 2000and ending in 2001. 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 2000 Form 1041 may also be usedfor a tax year beginning in 2001 if:

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

ends in 2001 and2. The 2001 Form 1041 is not

available by the time the estate or trust isrequired to file its tax return. However, theestate or trust must show its 2001 taxyear on the 2000 Form 1041 andincorporate any tax law changes that areeffective for tax years beginning afterDecember 31, 2000.

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 thefiduciary. 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 not

sign the return.

Paid Preparer

Generally, anyone who is paid to preparea 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 selectthe 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 2001 if it expectsto owe, after subtracting any withholdingand credits, at least $1,000 in tax, and itexpects the withholding and credits to beless than the smaller of:

1. 90% of the tax shown on the 2001tax return or

2. 100% of the tax shown on the 2000tax return (110% 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 2000 or

2001 is from farming or fishing).However, if a return was not filed for

2000 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 2001 (see theinstructions on page 15 for line 24e) orq The estate or trust would be required tomake estimated tax payments for 2001

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even 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 2000 tax year;

2. A decedent's estate for any tax yearending before the date that is 2 years

after the decedent's death; or3. A trust that was treated as owned

by 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 ofadministration) 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.

Electronic Deposits

A financial institution that maintains a

Treasury Tax and Loan (TT&L) account,and acts as a fiduciary for at least 200taxable trusts that are required to payestimated tax, may be required to depositthe estimated tax payments electronicallyusing the Electronic Federal Tax PaymentSystem (EFTPS). The electronic depositrequirement applies in 2001 if:q The total deposits of depository taxes(such as estimated, employment, orexcise tax) in 1999 were more than$200,000 orq The fiduciary (on behalf of a trust) wasrequired to use EFTPS in 2000.

If the fiduciary is required to use EFTPSon behalf of a trust and fails to do so, itmay be subject to a 10% penalty.

A fiduciary that is not required to makeelectronic deposits of estimated tax onbehalf of a trust may either use thepayment vouchers (see Form 1041-ES)or voluntarily participate in EFTPS. Toenroll in or get more information aboutEFTPS, call 1-800-555-4477 or1-800-945-8400.Depositing on time. For deposits madeby EFTPS to be on time, the fiduciarymust initiate the transaction at least 1business day before the date the depositis due.

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 for line 24b onpage 15 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 ReturnThe law provides a penalty of 5% of thetax due for each month, or part of amonth, the return is not filed up to amaximum of 25% of the tax due. If thereturn is more than 60 days late, theminimum penalty is the smaller of $100or the tax due. The penalty will not beimposed if you can show that the failureto file on time was due to reasonablecause. If the failure is due to reasonablecause, attach an explanation to the return.

Late Payment of Tax

Generally, the penalty for not paying tax

when 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 penaltyapplies to any unpaid tax on the return.Any penalty is in addition to interestcharges on 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 Information

TimelyYou 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 theinformation 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 a

calendar 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 andTax 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-SkippingTransfer 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.

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Form 940 or Form 940-EZ, Employer'sAnnual 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. Agriculturalemployers 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 RecoveryPenaltyon page 7.Form 945, Annual Return of WithheldFederal Income Tax. Use this form toreport income tax withheld from

nonpayroll payments, including pensions,annuities, IRAs, gambling winnings, andbackup withholding.Caution: SeeTrust Fund RecoveryPenaltyon page 7.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 ForeignPerson's U.S. Source Income Subject to

Withholding. 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 filethese information returns to report

acquisitions 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 (includingSEPs, SIMPLEs, Roth IRAs, Ed IRAs,Roth Conversions, and IRArecharacterizations), insurance contracts,

etc.; and proceeds from real estatetransactions.

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

avoid 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 itemon 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 Withholding

on 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 foreignbeneficiary 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 one

transaction (or a series of relatedtransactions).Form 8865, Return of U.S. Persons WithRespect to Certain Foreign Partnerships.The estate or trust may have to file Form8865 if it:

1. Controlled a foreign partnership(i.e., owned more than a 50% direct orindirect interest in a foreign partnership).

2. Owned at least a 10% direct orindirect interest in a foreign partnershipwhile U.S. persons controlled thatpartnership.

3. Had an acquisition, disposition, orchange in proportional interest in a foreignpartnership that:

a. Increased its direct interest to atleast 10%;

b. Reduced its direct interest of atleast 10% to less than 10%; or

c. Changed its direct interest by atleast a 10% interest.

4. Contributed property to a foreignpartnership in exchange for a partnershipinterest if:

a. Immediately after the contribution,the estate or trust owned, directly orindirectly, at least a 10% interest in theforeign partnership or

b. The fair market value of theproperty the estate or trust contributed tothe foreign partnership in exchange for apartnership interest, when added to othercontributions of property made to theforeign partnership during the preceding12-month period, exceeds $100,000.

Also, the estate or trust may have to fileForm 8865 to report certain dispositionsby a foreign partnership of property itpreviously contributed to that foreignpartnership if it was a partner at the time

of the disposition.For more details, including penalties for

failing to file Form 8865, see Form 8865and its separate instructions.

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.

AttachmentsIf 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 you

in 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. Code

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must file a return if the bankruptcy estatehas gross income of $6,475 or more fortax years beginning in 2000.

Failure to do so may result in anestimated Request for AdministrativeExpenses being filed by the IRS in thebankruptcy proceeding or a motion tocompel filing of the return.

CAUTION

!The filing of a tax return for thebankruptcy estate does not relievethe individual 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 Period

A 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 toinspection 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 allowedunder 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 under

an 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 net

operating 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 previoustax 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 be

carried back to pre-bankruptcy years ofthe individual debtor.Exemption. For tax years beginning in2000, a bankruptcy estate is allowed apersonal exemption of $2,800.Standard deduction. For tax yearsbeginning in 2000, a bankruptcy estatethat does not itemize deductions isallowed a standard deduction of $3,675.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, any

amounts 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 filea written application for the determinationwith the IRS. Send the request to the

Small Business/Self-Employed InsolvencyTerritory Manager for the territory in whichthe bankruptcy case is pending. Theapplication must be submitted in duplicateand executed under the penalties ofperjury. The trustee ordebtor-in-possession must submit with theapplication an exact copy of the return(or returns) filed by the trustee with theIRS for a completed tax period, and astatement of the name and location of theoffice where the return was filed. Theenvelope should be marked, Request forPrompt Determination. DO NOT OPEN INMAILROOM.

The IRS will notify the trustee or

debtor-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.

If taxable income

is:

OverBut notover

The tax is:Of the

amountover

$0 $21,925 15% $021,925 52,975 $3,288.75 + 28% 21,92552,975 80,725 11,982.75 + 31% 52,97580,725 144,175 20,585.25 + 36% 80,725

144,175 ------ 43,427.25 + 39.6% 144,175

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Enter on Form 1041, line 23, the totaltax from line 57 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 trust

from the Form SS-4, Application forEmployer Identification Number, that youused to apply for the EIN.

If a grantor type trust (discussed on thispage), 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 hasa P.O. box, show the box number instead

of 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,pooled income funds, and bankruptcyestates. SeeSpecial Filing Instructionsfor Grantor Type Trusts and PooledIncome Fundson page 4, orSpecialFiling Instructions for BankruptcyEstateson page 9.

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 not

provide 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 Trust

A 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.

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.Pre-need funeral trusts. The purchasersof pre-need funeral services are the

grantors and the owners of pre-needfuneral trusts established under statelaws. See Rev. Rul. 87-127, 1987-2 C.B.156. However, the trustees of pre-needfuneral trusts can elect to file the returnand pay the tax for qualified funeral trusts.For more information, see Form1041-QFT, U.S. Income Tax Return forQualified Funeral Trusts.Nonqualified deferred compensationplans. 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 in

rabbi trust arrangements. The procedurealso provides guidance for requestingrulings on the plans that use these trusts.

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 8.

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 retainedby 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 more

information.

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 apply

for 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 from

one 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 nonexempt charitable trust is a trust:q That is not exempt from tax undersection 501(a);q In which all of the unexpired interestsare devoted to one or more charitablepurposes described in section170(c)(2)(B); andq For which a deduction was allowedunder section 170 (for individualtaxpayers) or similar Code section forpersonal holding companies, foreignpersonal holding companies, or estatesor trusts (including a deduction for estateor gift tax purposes).

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Nonexempt charitable trust treated asa private foundation. If a nonexemptcharitable trust is treated as though itwere a private foundation under section509, then the fiduciary must file Form990-PF, Return of Private Foundation, inaddition to 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 section

6012 filing requirement. But, be sure toanswer Statement 13, on Part VII-A ofForm 990-PF.

Excise taxes. If a nonexemptcharitable trust is treated as a privatefoundation, then it is subject to the sameexcise taxes under chapters 41 and 42that a private foundation is subject to. Ifthe nonexempt charitable trust is liable forany of these taxes (except the section4940 tax), then it reports these taxes onForm 4720, Return of Certain ExciseTaxes on Charities and Other PersonsUnder Chapters 41 and 42 of the InternalRevenue Code. Taxes paid by the truston Form 4720 or on Form 990-PF (the

section 4940 tax) cannot be taken as adeduction on Form 1041.

Not a Private Foundation

Check this box if the nonexemptcharitable trust (section 4947(a)(1)) is nottreated as a private foundation undersection 509. For more information, seeRegulations section 53.4947-1.Other returns that must be filed. If anonexempt charitable trust is not treatedas though it were a private foundation, thefiduciary must file, in addition to Form1041, Form 990 (or Form 990-EZ),Return of Organization Exempt FromIncome Tax, and Schedule A (Form

990), Organization Exempt Under Section501(c)(3), if the trust's gross receipts arenormally 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).

A split-interest trust is a trust that:q Is not exempt from tax under section

501(a);q Has some unexpired interests that aredevoted to purposes other than religious,charitable, or similar purposes describedin section 170(c)(2)(B); andq Has amounts transferred in trust afterMay 26, 1969, for which a deduction wasallowed under section 170 (for individualtaxpayers) or similar Code section forpersonal holding companies, foreignpersonal holding companies, or estatesor trusts (including a deduction for estateor gift tax purposes).

Other returns that must be filed. Thefiduciary of a split-interest trust must fileForm 5227 (for amounts transferred intrust after May 26, 1969); and Form1041-A if the trust's governing instrumentdoes not require that all of the trust'sincome 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.

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

Amended Return

If you are filing an amended Form 1041:q Check the Amended return box,q Complete the entire return,q Correct the appropriate lines with thenew information, andq Refigure the estate's or trust's taxliability.

If the total tax on line 23 is larger on the

amended return than on the originalreturn, you generally should pay thedifference with the amended return.However, you should adjust this amountif there is any increase or decrease in thetotal payments shown on line 25.

Attach a sheet that explains the reasonfor the amendments and identifies thelines and amounts being changed on theamended return.Amended Schedule K-1 (Form 1041).If the amended return results in a changeto income, or a change in distribution ofany income or other information providedto a beneficiary, an amended ScheduleK-1 (Form 1041) must also be filed with

the amended Form 1041 and given toeach beneficiary. Check the AmendedK-1 box at the top of the amendedSchedule 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 34.

G. Pooled Mortgage AccountIf you bought a pooled mortgage accountduring the year and still have that pool atthe end of the tax year, check theBought 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 identifythe 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) withbanks, 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 earnedafter 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 the

subtotal, 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's

final 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 thedecedent's estate. Also, show the part ofthe ordinary dividends reported on Form1041 and subtract it from the subtotal.

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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 includedon 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 deductionis apportioned between the income

beneficiaries 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, and

devisees 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 tothe 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).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 can

deduct 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 deduct

for 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 tax

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attributable 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 been

established 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, rentalactivities 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 are

allowed. 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 the

amount 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 abeneficiary of such trust;

4. A fiduciary of a trust and abeneficiary 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

us internal revenue service: i1041--2000

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