U. S. Business Income Tax Return

Instructions for
Form 1120-SF

Department of the Treasury
Internal Revenue Service

(Rev. October 2013)

U.S. Income Tax Return for Settlement Funds
Section references are to the Internal Revenue Code
unless otherwise noted.

Future Developments

income tax liability of a designated or
qualified settlement fund.

Who Must File

For the latest information about
developments related to Form 1120-SF and
its instructions, such as legislation enacted
after they were published, go to
www.irs.gov/form1120sf.

All section 468B designated and qualified
settlement funds must file an annual income
tax return on Form 1120-SF.

What's New

Generally, a settlement fund must file its
income tax return by the 15th day of the 3rd
month after the end of its tax year.

For tax years beginning in 2013, the tax rate
on a fund's modified gross income has
increased to 39.6%.

General Instructions
Purpose of Form

Use Form 1120-SF, U.S. Income Tax Return
for Settlement Funds, to report transfers
received, income earned, deductions
claimed, distributions made, and to figure the

When To File

If the due date falls on a Saturday,
Sunday, or legal holiday, the fund may file on
the next business day.
Private delivery services. Settlement
funds can use certain private delivery
services designated by the IRS to meet the
timely mailing as “timely filing/paying” rule for
tax returns and payments. See the
Instructions for Form 1120, U.S. Corporation
Income Tax Return, for details.

Where To File
File the fund's return at the applicable IRS address listed below.
If the fund's principal
business, office, or agency
is located in:
Connecticut, Delaware,
District of Columbia, Florida,
Georgia, Illinois, Indiana,
Kentucky, Maine, Maryland,
Massachusetts, Michigan,
New Hampshire, New Jersey,
New York, North Carolina,
Ohio, Pennsylvania, Rhode
Island, South Carolina,
Tennessee, Vermont, Virginia,
West Virginia, Wisconsin

Alabama, Alaska, Arizona,
Arkansas, California,
Colorado, Hawaii, Idaho, Iowa,
Kansas, Louisiana, Minnesota,
Mississippi, Missouri,
Montana, Nebraska, Nevada,
New Mexico, North Dakota,
Oklahoma, Oregon, South
Dakota, Texas, Utah,
Washington, Wyoming
A foreign country or U.S.
possession

Oct 24, 2013

And the total assets at the
end of the tax year (Form
1120-SF, Schedule L, line 6,
column (b)) are:

Less than $10 million

$10 million or more

Use the following address:

Department of the Treasury
Internal Revenue Service
Center
Cincinnati, OH 45999-0012

Department of the Treasury
Internal Revenue Service
Center
Ogden, UT 84201-0012

Any Amount

Department of the Treasury
Internal Revenue Service
Center
Ogden, UT 84201-0012

Any Amount

Internal Revenue Service
Center
P.O. Box 409101
Ogden, UT 84409
Cat. No. 14988X

Private delivery services cannot
deliver items to P.O. boxes. The
CAUTION
fund must use the U.S. Postal
Service to mail any items to an IRS P.O. box
address.

!

Extension of time to file. File Form 7004,
Application for Automatic 6-Month Extension
of Time To File Certain Business Income
Tax, Information, and Other Returns, to
request a 6-month extension of time to file.
Generally, file Form 7004 by the regular due
date of the return.

Who Must Sign

The return must be signed and dated by the
administrator of the fund.
If an employee of the fund completes
Form 1120-SF, the paid preparer's space
should remain blank. Anyone who prepares
Form 1120-SF but does not charge the fund
should not complete that section. Generally,
anyone who is paid to prepare the return
must sign it and fill in the “Paid Preparer Use
Only” area.
The paid preparer must complete the
required preparer information and:
Sign the return in the space provided for
the preparer's signature.
Give a copy of the return to the
administrator.
Note. A paid preparer may sign original or
amended returns by rubber stamp,
mechanical device, or computer software
program.

Paid Preparer
Authorization

If the fund wants to allow the IRS to discuss
its tax return with the paid preparer who
signed it, check the “Yes” box in the
signature area of the return. This
authorization applies only to the individual
whose signature appears in the “Paid
Preparer Use Only” section of the fund's
return. It does not apply to the firm, if any,
shown in that section.

If the “Yes” box is checked, the fund is
authorizing the IRS to call the paid preparer
to answer any questions that may arise
during the processing of its return. The fund
is also authorizing the paid preparer to:
Give the IRS any information that is
missing from the return,
Call the IRS for information about the
processing of the return or the status of any
related refund or payment(s), and
Respond to certain IRS notices about
math errors, offsets, and return preparation.

The fund is not authorizing the paid
preparer to receive any refund check, bind
the fund to anything (including any additional
tax liability), or otherwise represent the fund
before the IRS.
The authorization will automatically end
no later than the due date (excluding
extensions) for filing the fund's tax return. If
the fund wants to expand the paid preparer's
authorization or revoke the authorization
before it ends, see Publication 947, Practice
Before the IRS and Power of Attorney.

Assembling the Return

To ensure that the fund's tax return is
processed correctly, attach all schedules in
alphabetical order and other forms in
numerical order after Form 1120-SF.
Complete every applicable entry space
on Form 1120-SF. Do not write “See
Attached” instead of completing the entry
spaces. If more space is needed on the
forms or schedules, attach separate sheets
using the same size and format as the
printed forms. If there are supporting
statements and attachments, arrange them
in the same order as the schedules or forms
they support and attach them last. Show the
totals on the printed forms. Enter the fund's
name and employer identification number
(EIN) on each supporting statement or
attachment.

Tax Payments

The fund must pay any tax due in full no later
than the 15th day of the 3rd month after the
end of the tax year.

Electronic Deposit
Requirement

Settlement funds must use electronic funds
transfers to make all federal tax deposits
(such as deposits of employment, excise,
and income tax). Generally, electronic funds
transfers are made using the Electronic
Federal Tax Payment System (EFTPS).
However, if the fund does not want to use
EFTPS, it can arrange for its tax
professional, financial institution, payroll
service, or other trusted third party to make
deposits on its behalf. Also, it may arrange
for its financial institution to initiate a
same-day tax wire payment (discussed
below) on its behalf. EFTPS is a free service
provided by the Department of the Treasury.
Services provided by a tax professional,
financial institution, payroll service, or other
third party may have a fee.
To get more information about EFTPS or
to enroll in EFTPS, visit www.eftps.gov, or
call 1-800-555-4477
(TTY/TDD 1-800-733-4829).

Depositing on time. For deposits made by
EFTPS to be on time, the fund must initiate
the deposit by 8 p.m. Eastern time the day
before the date the deposit is due. If the fund
uses a third party to make deposits on its
behalf, they may have different cutoff times.
Same-day wire payment option. If the
fund fails to initiate a deposit transaction on

EFTPS by 8 p.m. Eastern time the day
before the date a deposit is due, it can still
make the deposit on time by using the
Federal Tax Application (FTA). Before using
the same-day wire payment option, the fund
will need to make arrangements with its
financial institution ahead of time. Please
check with the financial institution regarding
availability, deadlines, and costs. To learn
more about making a same-day wire
payment and download the Same-Day
Payment Worksheet, visit www.eftps.gov.

Estimated Tax Payments

Generally, the following rules apply to the
fund's payments of estimated tax.
A fund must make installment payments of
estimated tax if it expects its total tax for the
year (less applicable credits) to be $500 or
more.
The installments are due by the 15th day
of the 4th, 6th, 9th, and 12th months of the
tax year. If any date falls on a Saturday,
Sunday, or legal holiday, the installment is
due on the next business day.
The fund must use electronic fund
transfers to make installment payments of
estimated tax.
Use Form 1120-W, Estimated Tax for
Corporations, as a worksheet to compute
estimated tax. See the Instructions for Form
1120-W.
If the fund overpaid estimated tax, it may
be able to get a quick refund by filing Form
4466, Corporation Application for Quick
Refund of Overpayment of Estimated Tax.
For more information on estimated tax
payments, including penalties that apply if
the fund fails to make required payments,
see the instructions for line 17.

Interest and Penalties
Interest. Interest is charged on taxes paid
late even if an extension of time to file is
granted. Interest is also charged on penalties
imposed for failure to file, negligence, fraud,
substantial valuation misstatements,
substantial understatements of tax, and
reportable transaction understatements from
the due date (including extensions) to the
date of payment. The interest charge is
figured at a rate determined under section
6621.
Late filing of return. A fund that does not
file its tax return by the due date, including
extensions, may be penalized 5% of the
unpaid tax for each month or part of a month
the return is late, up to a maximum of 25% of
the unpaid tax. The minimum penalty for a
return that is over 60 days late is the smaller
of the tax due or $135. The penalty will not
be imposed if the fund can show that the
failure to file on time was due to reasonable
cause. A fund that does not pay the tax when
due generally may be penalized 1 2 of 1% of
the unpaid tax for each month or part of a
month the tax is not paid, up to a maximum
of 25% of the unpaid tax. The penalty will not
be imposed if the fund can show that the
failure to pay on time was due to reasonable
cause.
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Late payment of tax. A fund that does not
pay the tax when due generally may be
penalized 1 2 of 1% of the unpaid tax for each
month or part of a month the tax is not paid,
up to a maximum of 25% of the unpaid tax.
The penalty will not be imposed if the fund
can show that the failure to pay on time was
due to reasonable cause.
Reasonable cause determinations. If the
fund receives a notice about penalties after it
files its return, send the IRS an explanation,
and we will determine if the fund meets the
reasonable cause criteria. Do not attach an
explanation when the fund files its return.
The trust fund recovery penalty. This
penalty may apply if certain excise, income,
social security, and Medicare taxes that must
be collected or withheld are not collected or
withheld, or these taxes are not paid. The
trust fund recovery penalty may be imposed
on all persons who are determined by the
IRS to have been responsible for collecting,
accounting for, and paying over these taxes,
and who acted willfully in not doing so. The
penalty is equal to the unpaid trust fund tax.
See the Instructions for Form 720 or
Publication 15 (Circular E), Employer's Tax
Guide, for details, including the definition of
responsible persons.
Other penalties. Other penalties can be
imposed for negligence, substantial
understatement of tax, reportable transaction
understatements, and fraud. See sections
6662, 6662A, and 6663.

Tax Year and Accounting
Method

A designated or qualified settlement fund's
tax year is the calendar year and the fund
must use the accrual method of accounting.

Rounding Off to Whole
Dollars

The fund may round off cents to whole
dollars on its return and schedules. If the
fund does round to whole dollars, it must
round all amounts. To round, drop amounts
under 50 cents and increase amounts from
50 cents to 99 cents to the next dollar. For
example, $1.39 becomes $1 and $2.50
becomes $3.
If two or more amounts must be added to
figure the amount to enter on a line, include
cents when adding the amounts and round
off only the total.

Recordkeeping

Keep the fund's records for as long as they
may be needed for the administration of any
provision of the Internal Revenue Code.
Usually, records that support an item of
income, deduction, or credit on the return
must be kept for 3 years from the date the
return is due or filed, whichever is later. Keep
records that verify the fund's basis in
property for as long as they are needed to
figure the basis of the original or replacement
property.

The fund should keep copies of all filed
returns. They help in preparing future and
amended returns.

Additional Information

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

Definitions
Qualified Settlement Fund

A fund, account, or trust (“a fund”) is a
qualified settlement fund if it meets the
following requirements:
Governmental order or approval
requirement,
Resolve or satisfy requirement, and
Segregation requirement.
Governmental order or approval requirement. To meet this requirement, the fund
must be ordered by, or approved by, the
United States, any state (including the
District of Columbia), territory, possession, or
political subdivision thereof, or any agency or
instrumentality (including a court of law) of
any of the foregoing, and it must be subject
to the continuing jurisdiction of that
governmental authority.
A fund is ordered by or approved by a
governmental authority when the authority
issues its initial or preliminary order to
establish, or grants its initial or preliminary
approval of, the fund even if that order or
approval may be subject to review or
revision. Generally, a governmental
authority's order or approval has no
retroactive effect and does not permit a fund
to be a qualified settlement fund prior to the
date the order is issued or the approval is
granted. However, see Relation-back rule
below.
Arbitration panels. An arbitration award
that orders the establishment of, or
approves, a fund is an order or approval of a
governmental authority if:
The arbitration award is judicially
enforceable;
The arbitration award is issued following a
bona fide arbitration proceeding in
accordance with rules approved by a
governmental authority (such as
self-regulatory organization-administered
arbitration proceedings in the securities
industry); and
The fund is subject to the continuing
jurisdiction of the arbitration panel, the court
of law that has jurisdiction to enforce the
arbitration award, or the governmental
authority that approved the rules of the
arbitration proceedings.
Resolve or satisfy requirement. To meet
this requirement, a fund must be established
to resolve or satisfy one or more contested or
uncontested claims that have resulted, or
may result, from an event (or a series of
related events) that has occurred and that

has given rise to at least one claim asserting
liability:
Under the Comprehensive Environmental
Response, Compensation and Liability Act of
1980 (CERCLA); as amended for settlement
funds created before May 18, 2006.
Arising out of a tort, breach of contract, or
violation of law; or
Designated by the IRS in a revenue ruling
or revenue procedure.
Generally, a fund does not meet the
resolve or satisfy requirement if it is
established to resolve or satisfy a liability to
provide property or services unless the
transferor's obligation to provide property or
services is extinguished by a transfer or
transfers to the fund.
Note. Settlement funds created after May
17, 2006, for the purpose of resolving or
satisfying liabilities under the CERCLA are
exempt from tax. See section 468B(g)(2) for
more information.
Segregation requirement. To meet this
requirement, the fund must (a) be a trust
under applicable state law or (b) keep its
assets segregated from other assets of the
transferor (and related persons). For
example, cash held by a transferor in a
separate bank account satisfies the
segregation requirement.
Classification of fund prior to meeting all
three requirements. If a fund meets the
resolve or satisfy requirement, the assets of
the fund are treated as owned by the
transferor of those assets until the fund also
meets the governmental order and the
segregation requirements. On the day the
fund meets all three requirements, the
transferor is treated as transferring the
assets to a qualified settlement fund.
Relation-back rule. If a fund meets the
resolve or satisfy requirement and the
segregation requirement before it meets the
governmental order or approval requirement,
the transferor and the administrator (defined
below) may jointly elect the relation-back
election (defined below) to treat the fund as
coming into existence as a qualified
settlement fund on the later of (a) the date
the fund meets the resolve or satisfy
requirement and the segregation
requirement or (b) January 1 of the calendar
year in which all three requirements are
satisfied.
If a relation-back election is made, the
assets held by the fund on the date the
qualified settlement fund is treated as
coming into existence are treated as
transferred to the qualified settlement fund
on that date.
Relation-back election. Make the
relation-back election by attaching a copy of
the election statement to Form 1120-SF for
the tax year in which the qualified settlement
fund is treated as coming into existence. The
statement must be signed by each transferor
and the administrator. File Form 1120-SF
and the election statement by the due date of
Form 1120-SF, including extensions. The
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election statement must contain the
following:
The words “Regulations section 1.468B-1
Relation-Back Election” at the top of the first
page.
The name, address, and identifying
number of each transferor.
The name, address, and EIN of the
qualified settlement fund.
The date on which the qualified settlement
fund is treated as coming into existence.
A schedule describing each asset treated
as transferred to the fund on the date the
fund is treated as coming into existence. The
schedule of assets does not have to identify
the amount of cash or the property
transferred by a particular transferor.
Qualified settlement fund treated as a
corporation. Except as otherwise provided
in Regulations section 1.468B-5(b), for
purposes of subtitle F of the Internal
Revenue Code, a qualified settlement fund is
treated as a corporation and any tax
imposed under Regulations section
1.468B-2(a) is treated as a tax imposed by
section 11. See Regulations section
1.468B-2(k) for more information.

Designated Settlement Fund

A fund, account, or trust is a designated
settlement fund if it meets the following
requirements:
It is established by a court order and
completely extinguishes the taxpayer's tort
liability.
No amounts may be transferred to it other
than in the form of a qualified payment
(defined below).
It must be administered by persons, a
majority of whom are independent of the
taxpayer.
It is established for the principal purpose
of resolving and satisfying present and future
claims against the taxpayer arising out of
personal injury, death, or property damage.
The taxpayer may not hold any beneficial
interest in the income or corpus of it.
The taxpayer elects to have it treated as a
designated settlement fund.
Qualified payment. A qualified payment is
any money or property that is transferred to a
designated settlement fund under a court
order other than:
Any amount that may be transferred from
the fund to the taxpayer (or any related
person).
The transfer of any stock or indebtedness
of the taxpayer (or any related person).
Important. A designated settlement fund is
taxed in the same manner as a qualified
settlement fund. In addition, if a fund does
not meet the requirements of a designated
settlement fund but does meet the
requirements of a qualified settlement fund,
the fund is treated as a qualified settlement
fund.

Other Definitions
Administrator. An administrator, which
may include a trustee if the designated or
qualified settlement fund is a trust, is (in
order of priority):
The person designated or approved by
the governmental authority that ordered or
approved the fund.
The person designated in the escrow
agreement, settlement agreement, or other
similar agreement governing the fund.
The escrow agent, custodian, or other
person in possession of the fund's assets.
The transferor or, if there are multiple
transferors, all of the transferors unless an
agreement is signed by all of the transferors
that designates a single transferor as the
administrator.
Transferor. A transferor is a person who
transfers (or on whose behalf an insurer or
other person transfers) money or property to
a settlement fund to resolve or satisfy claims
against that person.
Related person. A related person is any
person who is related to the transferor within
the meaning of section 267(b) or section
707(b)(1).

Specific Instructions
Period Covered

A designated or qualified settlement fund's
tax year is the calendar year.

Address

Include the suite, room, or other unit number
after the street address. If the Post Office
does not deliver mail to the street address
and the fund or the administrator has a P.O.
box, show the box number instead.
If the corporation has a foreign address,
include the city or town, state or province,
country, and foreign postal code. Do not
abbreviate the country name. Follow the
country's practice for entering the name of
the state or province and postal code.

Employer Identification
Number (EIN)

Enter the fund's EIN. If the fund does not
have an EIN, it must apply for one. An EIN
may be applied for online, by telephone, by
fax, or by mail, depending on how soon the
fund needs to use the EIN. Use Form SS-4,
Application for Employer Identification
Number.
If the fund has not received its EIN by the
time the return is due, write “Applied for” in
the space for the EIN. For more details, see
the Instructions for Form SS-4.

Final Return, Name
Change, Address Change,
or Amended Return
Indicate a final return, name change,
address change, or amended return by

checking the appropriate box. If a change in
address occurs after the return is filed, use
Form 8822-B, Change of
Address or Responsible Party– Business, to
notify the IRS of the new address.

Part I. Income and
Deductions
Income

Note. Amounts transferred to the fund by or
on behalf of a transferor are generally
excluded from income.

Line 1. Taxable interest. Enter total
taxable interest received or accrued during
the tax year, including original issue
discount. Do not include any tax-exempt
interest. Do not offset interest expense
against interest income.
Note. Report tax-exempt interest on line 2 of
Additional Information (on page 2 of Form
1120-SF).
Line 3. Capital gain net income. Every
sale or exchange of a capital asset must be
reported in detail on Schedule D (Form
1120), Capital Gains and Losses (and Form
8949, Sales and Other Dispositions of
Capital Assets, if applicable), even if there is
no gain or loss. See the Instructions for
Schedule D (Form 1120).
Line 5. Other income. Enter any other
taxable income not reported on lines 1
through 4. List the type and amount of
income on an attached schedule. If the fund
has only one item of other income, describe
it in parentheses on the dotted line next to
the entry space for line 5.

Deductions

Do not deduct:
Expenses allocable to tax-exempt income
(see section 265);
Payments of claims made by the fund; and
Expenses incurred by, or on behalf of,
claimants or transferors.

Line 11. Other deductions. Enter the total
of other deductions not entered on lines 7
through 10. List the type and amount of
deduction on an attached schedule. If the
fund has only one item of other deduction,
describe it in parentheses on the dotted line
next to the entry space for line 11.
Line 12. Net operating loss deduction
(NOL). Enter the total NOL carryovers from
prior tax years, but do not enter more than
the fund's taxable income. See Regulations
section 1.468B-2(b)(4) for details.

allowed other than those on lines 16a
through 16e.
Line 17. Estimated tax penalty. A fund
that does not make estimated tax payments
when due may be subject to an
underpayment penalty for the period of
underpayment. Generally, a fund is subject
to the penalty if its tax liability is $500 or
more and it did not timely pay the smaller of:
Its current year tax liability or
Its prior year's tax.
See section 6655 for details and exceptions,
including special rules for large funds.
Use Form 2220, Underpayment of
Estimated Tax by Corporations, to see if the
fund owes a penalty and to figure the amount
of the penalty. Generally, the fund does not
have to file this form because the IRS can
figure the amount of any penalty and bill the
fund for it. See Form 2220 for other
information that may apply.
If Form 2220 is attached, check the box
on line 17 and enter the amount of any
penalty on that line.
Paperwork Reduction Act Notice. We ask
for the information on this form to carry out
the Internal Revenue laws of the United
States. You are required to give us the
information. We need it to ensure that you
are complying with these laws and to allow
us to figure and collect the right amount of
tax.
You are not required to provide the
information requested on a form that is
subject to 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
their contents may become material in the
administration of any Internal Revenue law.
Generally, tax returns and return information
are confidential, as required by section 6103.
The time needed to complete and file this
form will vary depending on individual
circumstances. The estimated average time
is:
Recordkeeping . . . . . . . .

18 hr., 39 min.

Learning about the law or
the form . . . . . . . . . . . . .

2 hr., 25 min.

Preparing the form . . . . .

4 hr., 42 min.

Copying, assembling, and
sending the form to the
IRS . . . . . . . . . . . . . . . .

32 min.

Line 14. Modified gross income. Modified
gross income of a designated or qualified
settlement fund is its gross income, as
defined in section 61, computed with certain
modifications. See Regulations section
1.468B-2(b) for more information.

If you have comments concerning the
accuracy of these time estimates or
suggestions for making this form simpler, we
would be happy to hear from you. You can
write to the Internal Revenue Service, Tax
Forms and Publications Division, 1111
Constitution Ave., NW, IR-6526,
Washington, DC 20224.

Line 16. Credits and payments.
Generally, no credits or payments are

Do not send the tax form to this address.
Instead, see Where To File, earlier.

Part II. Tax Computation

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