1120-SF Instructions for Form 1120-SF

Instructions for
Form 1120-SF

Department of the Treasury
Internal Revenue Service

(Rev. November 2018)

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

Future Developments
For the latest information about
developments related to Form 1120-SF
and its instructions, such as legislation
enacted after they were published, go to
IRS.gov/Form1120SF.

What's New
Address change for filing. The filing
address for funds located in certain areas
will change for returns filed after
December 31, 2018. See Where To File,
later.
Increase in penalty for failure to file.
The minimum penalty for failure to file a
return that is over 60 days late has
increased to the smaller of the tax due or
$210. See Late filing of return, later.
Change in tax rate. For tax years
beginning in 2018, the rate for calculating
tax on a fund’s modified gross income has
decreased to 37% (0.37).

General Instructions
Purpose of Form

Use Form 1120-SF to report transfers
received, income earned, deductions
claimed, distributions made, and to figure
the income tax liability of a designated or
qualified settlement fund.

Who Must File

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

When To File

Generally, a settlement fund must file its
income tax return by the 15th day of the
4th month after the end of its tax year.
However, a fund with a fiscal tax year
ending on June 30 must file by the 15th
day of the 3rd month after the end of its
tax year. A fund with a short tax year
ending in June will be treated as if the
short year ended on June 30, and must file
by the 15th day of the 3rd month after the
end of its tax year.
If the due date falls on a Saturday,
Sunday, or legal holiday, the fund may file
on the next business day.
Private delivery services. Settlement
funds can use certain private delivery
services designated by the IRS to meet
the timely mailing as “timely filing/paying”
rule for tax returns and payments. See the
Instructions for Form 1120, U.S.
Corporation Income Tax Return, for
details.
Private delivery services cannot
deliver items to P.O. boxes. The
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 Extension
of Time To File Certain Business Income
Tax, Information, and Other Returns, to
request an 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.

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:
The United States

A foreign country or U.S. possession

Aug 16, 2018

Use the following address:

Department of the Treasury
Internal Revenue Service Center
Ogden, UT 84201-0012
Internal Revenue Service Center
P.O. Box 409101
Ogden, UT 84409

Cat. No. 14988X

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 also is 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 Pub. 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 4th 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 submit 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 EFTPS.gov or
call 800-555-4477
(TTY/TDD 800-733-4829).

Depositing on time. For any deposit
made by EFTPS to be on time, the fund
must submit 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 submit a deposit transaction
on EFTPS by 8 p.m. Eastern time the day
before the date a deposit is due, it can still
make its deposit on time by using the
Federal Tax Collection Service (FTCS).
To use the same-day payment method,
the fund will need to make arrangements
with its financial institution ahead of time
regarding availability, deadlines, and

costs. Financial institutions may charge a
fee for payments made this way. To learn
more about the information the fund will
need to provide to its financial institution to
make a same-day wire payment, visit the
IRS website at IRS.gov/Payments and
click on "Same-day wire."

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 also is 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 $210. The penalty won’t be imposed if
the fund can show that the failure to file on
time was due to reasonable cause.
Late payment of tax. A fund that doesn’t
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 won’t be imposed
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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 Pub. 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.

Accounting Method

A designated or qualified settlement 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
Pub. 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
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existence. The statement must be signed
by each transferor and the administrator.
File Form 1120-SF and the election
statement by the due date of Form
1120-SF, including extensions. The
election statement must contain the
following.
• The words “Regulations section
1.468B-1 Relation-Back Election” at the
top of the first page.
• The name, address, and identifying
number of each transferor.
• The name, address, and EIN of the
qualified settlement fund.
• The date on which the qualified
settlement fund is treated as coming into
existence.
• A schedule describing each asset
treated as transferred to the fund on the
date the fund is treated as coming into
existence. The schedule of assets does
not have to identify the amount of cash or
the property transferred by a particular
transferor.
Qualified settlement fund treated as a
corporation. Except as otherwise
provided in Regulations section
1.468B-5(b), for purposes of subtitle F of
the Internal Revenue Code, a qualified
settlement fund is treated as a corporation
and any tax imposed under Regulations
section 1.468B-2(a) is treated as a tax
imposed by section 11. See Regulations
section 1.468B-2(k) for more information.

Designated Settlement Fund

A fund, account, or trust is a designated
settlement fund if it meets the following
requirements.
• It is established by a court order and
completely extinguishes the taxpayer's tort
liability.
• No amounts may be transferred to it
other than in the form of a qualified
payment (defined below).
• It must be administered by persons, a
majority of whom are independent of the
taxpayer.
• It is established for the principal
purpose of resolving and satisfying
present and future claims against the
taxpayer arising out of personal injury,
death, or property 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).

Note. 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

Enter the tax year in the space provided at
the top of the form. For a calendar year,
enter the last two digits of the calendar
year in the first entry space. For a fiscal or
short tax year return, write in the tax year
at the top of the form.

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
can be applied for:
• Online — Click on the EIN link at
IRS.gov/Businesses/Small. The EIN is
issued immediately once the application
information is validated.
• By mailing or faxing 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 and the date
the fund applied 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. See the instructions for Form
8822-B for details.

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,

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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.

Part II. Tax Computation
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.
Line 16. Credits and payments.
Generally, no credits or payments are
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 burden for
business taxpayers filing this form is
approved under OMB control number
1545-0123 and is included in the
estimates shown in the instructions for
their business income tax return.

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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 send us comments from IRS.gov/
FormsPubs. Or you can write to the
Internal Revenue Service, Tax Forms and
Publications Division, 1111 Constitution
Ave. NW, IR-6526, Washington, DC
20224.
Do not send the tax form to this office.
Instead, see Where To File, earlier.