US Internal Revenue Service: i1041--1996

8/14/2019 US Internal Revenue Service: i1041--1996

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96Department of the TreasuryInternal Revenue Service

Instructions for Form 1041 andSchedules A, B, D, G, I, J, andK-1U.S. Income Tax Return for Estates and TrustsSection references are to the Internal Revenue Code unless otherwise noted.

Paperwork Reduction Act NoticeWe ask for the information on this form to carry out the Internal Revenue laws of theUnited States. You are required to give us the information. We need it to ensure thatyou are complying with these laws and to allow us to figure and collect the right amountof 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 Code

section 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 3.

Changes To Noteq Three new optional filing methods forcertain grantor type trusts are available fortax years beginning after 1995. Theoptional methods are alternatives to thefiling of Form 1041 for these trusts. If thetrustee elects an optional method, he orshe generally must file a final Form 1041for the tax year that immediately precedesthe first tax year for which the trusteeelects to report under one of the optionalmethods. For details, see page 7.q For tax years beginning in 1996, therequirement to file a return for abankruptcy estate applies only if grossincome is at least $5,900.

Unresolved Tax ProblemsThe Problem Resolution Program is fortaxpayers that have been unable toresolve their problems with the IRS. If theestate or trust has a tax problem it cannotclear up through normal channels, writeto the estate's or trust's local IRS DistrictDirector, or call the local IRS office andask for Problem Resolution assistance.Persons who have access to TTY/TDDequipment may call 1-800-829-4059 toask for help from Problem Resolution.

This office cannot change the tax law ortechnical decisions. But it can help clearup problems that resulted from previouscontacts.

How To Get Forms andPublicationsBy personal computer. If yousubscribe to an on-line service, ask if IRSinformation is available and, if so, how toaccess it. You can get information throughIRIS, the Internal Revenue InformationServices, on FedWorld, a government

Contents Page

Other Information . . . . . . . . . . 17

Schedule IAlternative Minimum Tax 18

Schedule D (Form 1041)CapitalGains and Losses . . . . . . . . . 22

Schedule J (Form 1041)Accumulation Distribution for aComplex Trust . . . . . . . . . . 23

Schedule K-1 (Form 1041)Beneficiary's Share of Income,

Deductions, Credits, etc. . . . . . 25

Form 1041 Schedule D Schedule J Schedule K-1

Recordkeeping 40 hr., 53 min. 16 hr., 1 min. 39 hr. , 28 min. 8 hr., 22 min.Learning about the law or the form 18 hr., 37 min. 1 hr., 47 min. 1 hr., 5 min. 1 hr., 12 min.Preparing the form 34 hr., 58 min. 2 hr., 8 min. 1 hr., 47 min. 1 hr., 23 min.Copying, assembling, and sendingthe form to the IRS 4 hr., 17 min.

Contents Page Contents PageChanges To Note . . . . . . . . . . 1

Of Special Interest to BankruptcyTrustees and Debtors-in-Possession . . . . . . . . . . . 5

Unresolved Tax Problems . . . . . 1

How To Get Forms and Publications 1

Specific Instructions . . . . . . . 7General Instructions . . . . . . . . 2

Name of Estate or Trust . . . . . . 7Purpose of Form . . . . . . . . . . 2

Address . . . . . . . . . . . . . . 7Income Taxation of Trusts andDecedents' Estates . . . . . . . . 2 Type of Entity . . . . . . . . . . . 7

Definitions . . . . . . . . . . . . . . 2 Number of Schedules K-1 Attached 8Who Must File . . . . . . . . . . . 2 Employer Identification Number . . . 8Electronic Filing . . . . . . . . . . . 3 Date Entity Created . . . . . . . . . 8When To File . . . . . . . . . . . . 3 Nonexempt Charitable and Split-Interest

Trusts . . . . . . . . . . . . . . . 8Period Covered . . . . . . . . . . . 3

Initial Return, Amended Return, FinalReturn; or Change in Fiduciary'sName or Address . . . . . . . . . 9

Where To File . . . . . . . . . . . . 3Who Must Sign . . . . . . . . . . . 4

Accounting Methods . . . . . . . . 4Pooled Mortgage Account . . . . . 9

Accounting Periods . . . . . . . . . 4Income . . . . . . . . . . . . . . . 9

Rounding Off to Whole Dollars . . . 4Deductions . . . . . . . . . . . . . 10

Estimated Tax . . . . . . . . . . . 4Tax and Payments . . . . . . . . . 13

Interest and Penalties . . . . . . . . 4Schedule ACharitable Deductions 14

Other Forms That May Be Required 5Schedule BIncome Distribution

Deduction . . . . . . . . . . . . . 14Attachments . . . . . . . . . . . . . 5

Additional Information . . . . . . . . 5 Schedule GTax Computation . . . 16

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bulletin board. Tax forms, instructions,publications, and other IRS informationare available through IRIS.

IRIS is accessible directly using yourmodem by calling 703-321-8020. On theInternet, telnet to iris.irs.ustreas.gov or,for file transfer protocol services, connectto ftp.irs.ustreas.gov. If you are using theWorld Wide Web, connect tohttp://www.irs.ustreas.gov. FedWorld'shelp desk offers technical assistance onaccessing IRIS (not tax help) during

regular business hours at 703-487-4608.The IRIS menus offer information onavailable file formats and softwareneeded to read and print files. You mustprint the forms to use them; they are notdesigned to be filled in on-screen.

Tax forms, instructions, andpublications are also available onCD-ROM, including prior-year formsstarting with the 1991 tax year. Forordering information and softwarerequirements, contact the GovernmentPrinting Office's Superintendent ofDocuments (202-512-1800) or FederalBulletin Board (202-512-1387).By phone and in person. To order

forms and publications, call1800TAX-FORM (18008293676).You can also get most forms andpublications at your local IRS office.

General Instructions

Purpose of FormThe fiduciary of a domestic decedent'sestate, trust, or bankruptcy estate usesForm 1041 to report: (a) the income,deductions, gains, losses, etc. of theestate or trust; (b) the income that iseither accumulated or held for futuredistribution or distributed currently to the

beneficiaries; (c) any income tax liabilityof the estate or trust; and (d) employmenttaxes on wages paid to householdemployees.

Income Taxation of Trustsand Decedents' EstatesA trust (except a grantor type trust) or adecedent's estate is a separate legalentity for Federal tax purposes. Adecedent's estate comes into existenceat the time of death of an individual. Atrust may be created during an individual'slife (inter vivos) or at the time of his or herdeath under a will (testamentary). If the

trust instrument contains certainprovisions, then the person creating thetrust (the grantor) is treated as the ownerof the trust's assets. Such a trust is agrantor type trust.

A trust or decedent's estate figures itsgross income in much the same manneras an individual. Most deductions andcredits allowed to individuals are alsoallowed to estates and trusts. However,there is one major distinction. A trust ordecedent's estate is allowed an incomedistribution deduction for distributions to

beneficiaries. To figure this deduction, thefiduciary must complete Schedule B. Theincome distribution deduction determinesthe amount of the distribution that is taxedto the beneficiaries.

For this reason, a trust or decedent'sestate sometimes is referred to as apass-through entity. The beneficiary,and not the trust or decedent's estate,pays income tax on his or her distributiveshare of income. Schedule K-1 (Form1041) is used to notify the beneficiaries

of the amounts to be included on theirincome tax returns.Before preparing Form 1041, the

fiduciary 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 be distributedbecause the income distribution deductionis based, in part, on that amount.

Definitions

Beneficiary

A beneficiary is an heir, a legatee, or adevisee.

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 9, 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 and Deductions in Respectof a Decedent

When completing Form 1041, you musttake into account any items that areincome 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 finalForm 1040 under the decedent's methodof accounting.

IRD includes: (a) all accrued income ofa decedent who reported his or herincome on a cash method of accounting;(b) income accrued solely because of thedecedent's death in the case of adecedent who reported his or her income

on the accrual method of accounting; and(c) 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 a cashmethod are:q Deferred salary payments that arepayable to the decedent's estate.q Uncollected interest on U.S. savingsbonds.q Proceeds from the completed sale offarm produce.

q The portion of a lump sum distributionto the beneficiary of a decedent's IRA thatequals the balance in the IRA at the 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 it

would have had if the decedent lived andreceived such amount.The following deductions and credits,

when paid by the decedent's estate, areallowed on Form 1041 even though theywere not allowable on the decedent's finalForm 1040:q Business expenses deductible undersection 162.q Interest deductible under section 163.q Taxes deductible under section 164.q Investment expenses described insection 212 (in excess of 2% of AGI).q Percentage depletion allowed undersection 611.q

Foreign tax credit.For more information, see section 691.

Income Required To Be DistributedCurrently

Income required to be distributedcurrently is income that is required to bedistributed in the year it is received. Thefiduciary must be under a duty todistribute the income currently, even if theactual distribution is not made until afterthe close of the trust's tax year. SeeRegulations section 1.651(a)-2.

Fiduciary

A fiduciary is a trustee of a trust; or an

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

Trust

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

Who Must File

Decedent's Estate

The fiduciary (or one of the jointfiduciaries) must file Form 1041 for theestate of a domestic decedent that has:1. Gross income for the tax year of$600 or more, or2. A beneficiary who is a nonresidentalien.

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Trust

The fiduciary (or one of the jointfiduciaries) must file Form 1041 for adomestic trust taxable under section 641that has:1. Any taxable income for the tax year,or2. Gross income of $600 or more(regardless of taxable income), or3. A beneficiary who is a nonresidentalien.

Two or more trusts are treated as onetrust if such trusts have substantially thesame grantor(s) and substantially thesame primary beneficiary(ies), and aprincipal purpose of such trusts isavoidance of tax. This provision appliesonly to that portion of the trust that isattributable to contributions to corpusmade after March 1, 1984.

If you are a fiduciary of a nonresidentalien estate or foreign trust with U.S.source income, file Form 1040NR, U.S.Nonresident Alien Income Tax Return.

Bankruptcy Estate

The bankruptcy trustee or

debtor-in-possession must file Form 1041for the estate of an individual involved inbankruptcy proceedings under chapter 7or 11 of title 11 of the United States Codeif the estate has gross income for the taxyear of $5,900 or more. See Of SpecialInterest To Bankruptcy Trustees andDebtors-in-Possession on page 5 forother details.

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. SeeRegulations section 1.468B-5.

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, Form 9041,Application for Electronic/Magnetic MediaFiling of Business and Employee BenefitPlan Returns, must be filed. If Form 1041is filed electronically or on magnetic

media, Form 8453-F, U.S. Estate or TrustIncome Tax Declaration and Signature forElectronic and Magnetic Media Filing,must also be filed. For more details, getPub. 1437, Procedures for Electronic andMagnetic Media Filing of U.S. Income TaxReturns for Estates and Trusts, Form1041, and Pub. 1438, File Specifications,Validation Criteria, and Record Layoutsfor Electronic and Magnetic Media Filingof Estate and Trust Returns, Form 1041.To order these forms and publications, or

for more information on electronic andmagnetic media filing of Form 1041, callthe Magnetic Media Unit at thePhiladelphia Service Center at (215)516-7533 (not a toll-free number), or writeto:

Internal Revenue Service CenterAttention: Magnetic Media UnitDP 11511601 Roosevelt Blvd.Philadelphia, PA 19154

When To FileFor calendar year estates and trusts, fileForm 1041 and Schedules K-1 on orbefore April 15, 1997. 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, 1996, must fileForm 1041 by October 15, 1997.

Extension of Time To File

Estates. Use Form 2758, Applicationfor Extension of Time To File Certain

Excise, Income, Information, and OtherReturns, to apply for an extension of timeto 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 time

you are requesting. Form 8800 must befiled by the extended due date for Form1041.

Period CoveredFile the 1996 return for calendar year1996 and fiscal years beginning in 1996and ending in 1997. If the return is for afiscal year or a short tax year, fill in the taxyear space at the top of the form.

The 1996 Form 1041 may also be usedfor a tax year beginning in 1997 if:1. The estate or trust has a tax year ofless than 12 months that begins and endsin 1997; and

2. The 1997 Form 1041 is not availableby the time the estate or trust is requiredto file its tax return. However, the estateor trust must show its 1997 tax year onthe 1996 Form 1041 and incorporate anytax law changes that are effective for taxyears beginning after December 31, 1996.

Where To FileFor all estates and trusts, exceptcharitable and split-interest trusts andpooled income funds:

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

If you are located in

Please mail to thefollowing InternalRevenue Service

Center

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

Holtsville, NY 00501

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

Andover, MA 05501

Florida, Georgia, SouthCarolina

Atlanta, GA 39901

Indiana, Kentucky, Michigan,Ohio, West Virginia

Cincinnati, OH 45999

Kansas, New Mexico,Oklahoma, Texas

Austin, TX 73301

Alaska, Arizona, California(counties of Alpine, Amador,Butte, Calaveras, Colusa,Contra Costa, Del Norte, ElDorado, Glenn, Humboldt,Lake, Lassen, Marin,Mendocino, Modoc, Napa,Nevada, Placer, Plumas,Sacramento, San Joaquin,Shasta, Sierra, Siskiyou,Solano, Sonoma, Sutter,

Tehama, Trinity, Yolo, andYuba), Colorado, Idaho,Montana, Nebraska, Nevada,North Dakota, Oregon, SouthDakota, Utah, Washington,Wyoming

Ogden, UT 84201

California (all other counties),Hawaii

Fresno, CA 93888

Illinois, Iowa, Minnesota,Missouri, Wisconsin

Kansas City, MO 64999

Alabama, Arkansas,Louisiana, Mississippi, NorthCarolina, Tennessee

Memphis, TN 37501

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

Philadelphia, PA 19255

If you are located in

Please mail to thefollowing InternalRevenue Service

Center

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

Atlanta, GA 39901

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

Austin, TX 73301

Indiana, Kentucky,Michigan, Ohio, WestVirginia

Cincinnati, OH 45999

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

Fresno, CA 93888

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

Holtsville, NY 00501

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

Kansas City, MO 64999

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Who Must SignThe fiduciary, or an authorizedrepresentative, must sign Form 1041.

A financial institution that submittedestimated tax payments for trusts for

which it is the trustee must enter its EINin the 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 notsign the return.

Generally, anyone who is paid to

prepare a tax return must sign the returnand fill in the other blanks in the PaidPreparer's Use 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 facsimile signatureis acceptable if certain conditions are met.See Regulations section1.6695-1(b)(4)(iv) for details.q Give you a copy of the return in additionto the copy to be filed with the IRS.

Accounting Methods

Figure 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, get 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 1997 if it expects

to owe, after subtracting any withholdingand credits, at least $500 in tax, and itexpects the withholding and credits to beless than the smaller of:1. 90% of the tax shown on the 1997tax return, or2. 100% of the tax shown on the 1996tax 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 1996 or1997 is from farming or fishing).

However, if a return was not filed for1996 or that return did not cover a full 12months, item 2 does not apply.

ExceptionsEstimated tax payments are not requiredfrom:1. An estate of a domestic decedent ora domestic trust that had no tax liability forthe full 12-month 1996 tax year;2. A decedent's estate for any tax yearending before the date that is 2 yearsafter the decedent's death; or3. A trust that was treated as ownedby the decedent if the trust will receive theresidue of the decedent's estate under thewill (or if no will is admitted to probate, thetrust primarily responsible for payingdebts, taxes, and expenses ofadministration) for any tax year endingbefore the date that is 2 years after thedecedent's death.

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

Section 643(g) Election

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

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

See the instructions for line 24b formore details.

Interest and Penalties

Interest

Interest is charged on taxes not paid bythe due date, even if an extension of time

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

Late Filing of Return

The law provides a penalty of 5% amonth, or part of a month, up to amaximum of 25%, for each month thereturn is not filed. The penalty is imposedon the net amount due. If the return ismore than 60 days late, the minimumpenalty is the smaller of $100 or the taxdue. The penalty will not be imposed if

you can show that the failure to file ontime was due to reasonable cause. If thefailure is due to reasonable cause, attachan explanation to the return.

Late Payment of Tax

Generally, the penalty for not paying taxwhen due is 1/2 of 1% of the unpaidamount for each month or part of a monthit remains unpaid. The maximum penaltyis 25% of the unpaid amount. The penaltyis imposed on the net amount due. Anypenalty is in addition to interest chargeson late payments.Note: If you include interest or either ofthese penalties with your payment,

identify and enter these amounts in thebottom margin of Form 1041, page 1. Donot include the interest or penalty amountin the balance of tax due on line 27.

Failure To Supply Schedule K-1

The fiduciary must provide Schedule K-1(Form 1041) to each beneficiary whoreceives a distribution of property or anallocation of an item of the estate. Apenalty of $50 (not to exceed $100,000for any calendar year) will be imposed onthe fiduciary for each failure to furnishSchedule K-1 to each beneficiary unlessreasonable cause for each failure isestablished.

Underpaid Estimated TaxIf the fiduciary underpaid estimated tax,get 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 these

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

Philadelphia, PA 19255

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taxes are not paid to the IRS. These taxesare generally 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 underpayment oftax, and fraud. Get Pub. 17, Your FederalIncome Tax, for details on thesepenalties.

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

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

Transfer Tax Return for Terminations.Form 720, Quarterly Federal Excise TaxReturn. Use Form 720 to reportenvironmental excise taxes,communications and air transportationtaxes, fuel taxes, luxury tax on passengervehicles, manufacturers' taxes, shippassenger tax, and certain other excisetaxes.Caution: SeeTrust Fund RecoveryPenaltyon page 4.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.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 for

Agricultural Employees, instead of Form941, to report income tax withheld andemployer and employee social securityand Medicare taxes on farmworkers.Caution: SeeTrust Fund RecoveryPenaltyon page 4.Form 945, Annual Return of WithheldFederal Income Tax. Use this form toreport income tax withheld fromnonpayroll payments, including pensions,annuities, IRAs, gambling winnings, andbackup withholding.

Caution: SeeTrust Fund RecoveryPenaltyon page 4.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 toWithholding. Use these forms to reportand transmit withheld tax on payments or

distributions 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, MISC, OID, R,and S.You may have to file theseinformation returns to reportabandonments, acquisitions throughforeclosure, proceeds from broker andbarter exchange transactions, interestpayments, medical and dental health carepayments, miscellaneous income, originalissue discount, distributions frompensions, annuities, retirement orprofit-sharing plans, individual retirementarrangements, insurance contracts, andproceeds from real estate transactions.

Also, use these returns to reportamounts received as a nominee on behalfof 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, that

are not otherwise adequately disclosedon a tax return. The disclosure is made toavoid parts of the accuracy-relatedpenalty imposed for disregard of rules orsubstantial understatement of tax. Form8275 is also used for disclosures relatingto preparer penalties for understatementsdue to unrealistic positions or disregardof rules.Form 8275-R, Regulation DisclosureStatement, is used to disclose any 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 Withholdingon Dispositions by Foreign Persons ofU.S. Real Property Interests. Use theseforms to report and transmit withheld taxon the sale of U.S. real property by aforeign person. Also, use these forms toreport and transmit tax withheld fromamounts distributed to a foreignbeneficiary from a U.S. real property

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

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 employer identificationnumber on each sheet.

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

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

Of Special Interest toBankruptcy Trustees andDebtors-in-Possession

Taxation of Bankruptcy Estates ofan Individual

A bankruptcy estate is a separate taxableentity created when an individual debtorfiles a petition under either chapter 7 or11 of title 11 of the U.S. Code. The estateis administered by a trustee or a

debtor-in-possession. If the case is laterdismissed by the bankruptcy court, thedebtor is treated as if the bankruptcypetition had never been filed. Thisprovision does NOT apply to partnershipsor corporations.

Who Must File

Every trustee (or debtor-in-possession)for an individual's bankruptcy estate underchapter 7 or 11 of title 11 of the U.S. Codemust file a return if the bankruptcy estatehas gross income of $5,900 or more fortax years beginning in 1996.

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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.Note: The filing of a tax return for thebankruptcy estate does not relieve theindividual debtor of his or her (or their)individual tax obligations.

Employer Identification Number

Every bankruptcy estate of an individual

required to file a return must have its ownemployer identification number (EIN). Youmay apply for one on Form SS-4,Application for Employer IdentificationNumber. The social security number(SSN) of the individual debtor cannot beused as the EIN for the bankruptcy 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 the

tax 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 not

voluntary, 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 characterof assets;7. Method of accounting;8. Unused passive activity losses;9. Unused passive activity credits; and10. 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 underan Internal Revenue Code provision (e.g.,section 263, 265, or 275).Administrative expense loss. Whenfiguring a net operating loss, nonbusinessdeductions (including administrativeexpenses) are limited under section172(d)(4) to the bankruptcy estate'snonbusiness income. The excessnonbusiness deductions are anadministrative expense loss that may becarried back to each of the 3 precedingtax years and forward to each of the 7succeeding tax years of the bankruptcyestate. The amount of an administrativeexpense loss that may be carried to anytax year is determined after the 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 in1996, a bankruptcy estate is allowed apersonal exemption of $2,550.Standard deduction. For tax yearsbeginning in 1996, a bankruptcy estatethat does not itemize deductions isallowed a standard deduction of $3,350.Discharge of indebtedness. In a title11 case, gross income does not includeamounts that normally would be includedin gross income resulting from the

discharge of indebtedness. However, anyamounts excluded from gross incomemust be applied to reduce certain taxattributes in a certain order. Attach Form982, Reduction of Tax Attributes Due toDischarge of Indebtedness, to show thereduction of tax attributes.

Tax Rate Schedule

Figure the tax for the bankruptcy estateusing the tax rate schedule shown below.Enter the tax on Form 1040, line 38.

Prompt Determination of TaxLiability

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

a written application for the determinationwith the IRS District Director for thedistrict in which the bankruptcy case ispending. The application must besubmitted in duplicate and executedunder the penalties of perjury. The trusteeor debtor-in-possession must submit withthe application an exact copy of thereturn (or returns) filed by the trustee withthe IRS for a completed tax period, anda statement of the name and location ofthe office where the return was filed. Theenvelope should be marked, PersonalAttention of the Special ProceduresFunction (Bankruptcy Section). DO NOTOPEN IN MAILROOM.

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

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

Special Filing Instructions forBankruptcy Estates

Use Form 1041 only as a transmittal forForm 1040. In the top margin of Form1040 write Attachment to Form 1041. DONOT DETACH. Attach Form 1040 toForm 1041. Complete only theidentification area at the top of Form1041. Enter the name of the individualdebtor in the following format: John Q.Public Bankruptcy Estate. Beneath, enterthe name of the trustee in the followingformat: Avery Snow, Trustee. In item D,enter the date the petition was filed or thedate of conversion to a chapter 7 or 11

If taxable incomeis:

OverBut notover

The tax is:Of the

amountover

$0 $20,050 15% $020,050 48,450 $3,007.50 + 28% 20,05048,450 73,850 10,959.50 + 31% 48,45073,850 131,875 18,833.50 + 36% 73,850

131,875 ------ 39,722.50 + 39.6% 131,875

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case. Enter on Form 1041, line 23, anytax due from line 51 of Form 1040.Complete lines 24 through 29 of Form1041, and sign 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 employeridentification number (EIN).

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

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

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

a P.O. box, show the box number insteadof the street address.If you change your address after filing

Form 1041, use Form 8822, Change ofAddress, to notify the IRS.

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

Decedent's Estate

An estate of a deceased person is ataxable entity separate from the decedent.It generally continues to exist until thefinal distribution of the assets of the estateis made to the heirs and otherbeneficiaries. The income earned fromthe property of the estate during theperiod of administration or settlementmust be accounted for and reported bythe estate.

Simple Trust

A trust may qualify as a simple trust if:1. The trust instrument requires that allincome 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; and3. The trust does not distribute amountsallocated to the corpus of the trust.

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 thatinterest is more than 5% of the value ofthat portion. Also, the grantor is treatedas holding any power or interest that washeld by either the grantor's spouse at thetime that the power or interest wascreated or who became the grantor'sspouse after the creation of that power orinterest.

Report on Form 1041 the part of theincome that is taxable to the trust. Do notreport on Form 1041 the income that istaxable to the grantor or another person.Instead, attach a separate sheet to reportthe following:q The income of the trust that is taxableto the grantor or another person undersections 671 through 678;q The name, identifying number, andaddress of the person(s) to whom theincome is taxable; andq Any deductions or credits applied to thisincome.

The income taxable to the grantor oranother person under sections 671through 678 and the deductions andcredits applied to the income must bereported on the income tax return thatperson files.

Family estate trust. A family estatetrust is also known as a family, familyestate, pure, equity, equity pure, prime,or constitutional trust.

In most cases, the grantor transfersproperty to the trust or assigns to the trustthe income for services the grantorperforms. The trust instrument usuallyprovides:q Evidence of ownership, such ascertificates of beneficial interest in thetrust.q That the grantor is a trustee andexecutive officer.q That the trust pays the living expensesfor the grantor and the grantor's family.q That the corpus and undistributedincome are distributed to the owners afterthe trust is terminated.

Generally, a family estate trust istreated as a grantor type trust. For moreinformation, see Rev. Rul. 75-257, 1975-2C.B. 251.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 is

considered 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. Thepurchasers of pre-need funeral servicesare the grantors and the owners ofpre-need funeral trusts established under

state laws. See Rev. Rul. 87-127, 1987-2C.B. 156.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 inrabbi trust arrangements. The procedurealso provides guidance for requestingrulings on the plans that use these trusts.Optional filing methods for certaingrantor type trusts. Generally, for atrust all of which is treated as owned byone or more grantors or other persons,

the trustee may use one of the following3 optional methods to report instead offiling Form 1041:

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

of the trust is the trustee or a co-trusteeof the trust, the trustee must give thegrantor or other person treated as ownerof the trust a statement that (a) shows allitems of income, deduction, and credit ofthe trust; (b) identifies the payer of eachitem of income; (c) explains how thegrantor or other person treated as ownerof the trust takes those items into accountwhen figuring the grantor's or otherperson's taxable income or tax; and (d)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.

Method 2. For a trust treated as ownedby one grantor or by one other person, thetrustee must give all payers of incomeduring the tax year the name, address,and TIN of the trust. The trustee also mustfile with the IRS the appropriate Forms1099 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. In addition, unless

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the grantor or other person treated asowner of the trust is the trustee or aco-trustee of the trust, the trustee mustgive the grantor or other person treatedas owner of the trust a statement that (a)shows all items of income, deduction, andcredit of the trust; (b) explains how thegrantor or other person treated as ownerof the trust takes those items into accountwhen figuring the grantor's or otherperson's taxable income or tax; and (c)informs the grantor or other person

treated as the owner of the trust thatthose items must be included whenfiguring taxable income and credits on hisor her income tax return. This statementsatisfies the requirement to give therecipient copies of the Forms 1099 filedby the trustee.

Method 3. For a trust treated as ownedby two or more grantors or other persons,the trustee must give all payers of incomeduring the tax year the name, address,and TIN of the trust. The trustee also mustfile with the IRS the appropriate Forms1099 to report the income or grossproceeds paid to the trust by all payersduring the tax year attributable to the part

of the trust treated as owned by eachgrantor or other person, showing the trustas the payer and each grantor or otherperson treated as owner of the trust asthe payee. The trustee must report eachtype of income in the aggregate and eachitem of gross proceeds separately. Inaddition, the trustee must give eachgrantor or other person treated as ownerof the trust a statement that (a) shows allitems of income, deduction, and credit ofthe trust attributable to the part of the trusttreated as owned by the grantor or otherperson; (b) explains how the grantor orother person treated as owner of the trusttakes those items into account whenfiguring the grantor's or other person'staxable income or tax; and (c) informs thegrantor or other person treated as theowner of the trust that those items mustbe included when figuring taxable incomeand credits on his or her income taxreturn. This statement satisfies therequirement to give the recipient copiesof the Forms 1099 filed by the trustee.

Exceptions.The following trustscannot report using the optional filingmethods:1. A common trust fund (as defined insection 584(a)).2. A foreign trust or a trust that has anyof its assets located outside the United

States.3. A qualified subchapter S trust (asdefined in section 1361(d)(3)).4. A trust all of which is treated asowned by one grantor or one other personwhose tax year is other than a calendaryear.5. A trust all of which is treated asowned by one or more grantors or otherpersons, one of which is not a U.S.person.6. A trust all of which is treated asowned by one or more grantors or other

persons if at least one grantor or otherperson is an exempt recipient forinformation reporting purposes, unless atleast one grantor or other person is notan exempt recipient and the trusteereports without treating any of thegrantors or other persons as exemptrecipients.

A trustee who previously had filed Form1041 for any tax year ending beforeJanuary 1, 1996 (and who previously hadnot filed a final Form 1041 under the

simplified filing rule in effect prior toJanuary 1, 1996), or who files a Form1041 for any later tax year, can changeto one of the optional methods by filing afinal Form 1041 for the tax year thatimmediately precedes the first tax year forwhich the trustee elects to report underone of the optional methods. On the frontof the final Form 1041, the trustee mustwrite Pursuant to section 1.6714(g), thisis the final Form 1041 for this grantortrust, and check the Final return box initem F. For more details on changingreporting methods, including changesfrom one optional method to another, seeRegulations section 1.6714(g).

Backup withholding. Generally, agrantor trust is considered a payor ofreportable payments received by the trustfor purposes of backup withholding. If thetrust has 10 or fewer grantors, areportable payment made to the trust istreated as a reportable payment of thesame kind made to the grantors on thedate the trust received the payment. If thetrust has more than 10 grantors, areportable payment made to the trust istreated as a payment of the same kindmade by the trust to each grantor in anamount equal to the distribution made toeach grantor on the date the grantor ispaid or credited. The trustee must

withhold 31% of reportable paymentsmade to any grantor who is subject tobackup withholding. For more information,see section 3406 and TemporaryRegulations section 35a.9999-2, Q&A 20.

Bankruptcy Estate

A chapter 7 or 11 bankruptcy estate is aseparate and distinct taxable entity fromthe individual debtor for Federal incometax purposes. See Of Special Interest toBankruptcy Trustees andDebtors-in-Possession on page 5.

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 moreinformation.

If you are filing for a pooled incomefund, attach a statement to support thefollowing:q The calculation of the yearly rate ofreturn.q The computation of the deduction fordistributions to the beneficiaries.q The computation of any charitablededuction.

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

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

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

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

C. Employer IdentificationNumberEvery estate or trust must have an EIN.To apply for one, use Form SS-4. Youmay get this form from the IRS or theSocial Security Administration. See Pub.583, Starting a Business and KeepingRecords, for more information.

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

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

E. Nonexempt Charitable andSplit-Interest Trusts

Section 4947(a)(1) Trust

Check this box if the trust is a nonexemptcharitable trust within the meaning of

section 4947(a)(1). A nonexemptcharitable trust is a trust that is notexempt from tax under section 501(a); allof the unexpired interests are devoted toone or more charitable purposesdescribed in section 170(c)(2)(B); and forwhich a deduction was allowed undersection 170 (for individual taxpayers) orsimilar Code section for personal holdingcompanies, foreign personal holdingcompanies, or estates or trusts (includinga deduction for estate or gift taxpurposes).

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Not a Private Foundation

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

If a nonexempt charitable trust is nottreated as though it were a privatefoundation, the fiduciary must file Form990 (or Form 990-EZ), Return ofOrganization Exempt From Income Tax,and Schedule A (Form 990),Organization Exempt Under Section501(c)(3), in addition to Form 1041 if thetrust's gross receipts are normally morethan $25,000.

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

Section 4947(a)(2) Trust

Check this box if the trust is a split-interesttrust described in section 4947(a)(2). Asplit-interest trust is a trust that is notexempt from tax under section 501(a);has some unexpired interests that aredevoted to purposes other than religious,charitable, or similar purposes describedin section 170(c)(2)(B); and has amountstransferred in trust after May 26, 1969, forwhich a deduction was allowed undersection 170 (for individual taxpayers) orsimilar Code section for personal holdingcompanies, foreign personal holdingcompanies, or estates or trusts (includinga deduction for estate or gift taxpurposes).

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

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

Nonexempt Charitable TrustTreated as a Private Foundation

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

If a nonexempt charitable trust is

subject to any of the private foundationexcise taxes, then it must also file Form4720, Return of Certain Excise Taxes onCharities and Other Persons UnderChapters 41 and 42 of the InternalRevenue Code. Any private foundationtaxes paid by the trust cannot be takenas a deduction on Form 1041.

If a nonexempt charitable trust istreated as though it were a privatefoundation, and it has no taxable incomeunder Subtitle A, it may file Form 990-PF

instead of Form 1041 to meet its section6012 filing requirement.

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

Amended Return

If you are filing an amended Form 1041,check the Amended return box.Complete the entire return, correct theappropriate lines with the newinformation, and refigure the estate's ortrust's tax liability. If the total tax on line23 is larger on the amended return thanon the original return, you generallyshould pay the difference with theamended return. However, you shouldadjust this amount if there is any increaseor decrease in the total payments shownon line 25. On an attached sheet explainthe reason for the amendments andidentify the lines and amounts beingchanged on the amended return.

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

Final Return

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

If, on the final return, there are excessdeductions, an unused capital losscarryover, or a net operating losscarryover, see the discussion in theSchedule K-1 instructions on page 27.Figure the deductions on an attachedsheet.

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

mortgage 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, report

on line 1 of Schedule B (Form 1040) orSchedule 1 (Form 1040A) the totalinterest shown on Form 1099-INT. Underthe last entry on line 1, subtotal all theinterest reported on line 1. Below thesubtotal, write Form 1041 and the nameand address shown on Form 1041 for thedecedent's estate. Also, show the part ofthe interest reported on Form 1041 andsubtract it from the subtotal.

Line 2Dividends

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

For the year of the decedent's death,

Forms 1099-DIV issued in the decedent'sname may include dividends earned afterthe date of death that should be reportedon the income tax return of the decedent'sestate. When preparing the decedent'sfinal income tax return, report on line 5 ofSchedule B (Form 1040) or Schedule 1(Form 1040A) the total dividends shownon Form 1099-DIV. Under the last entryon 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 dividends reported on Form 1041 andsubtract it from the subtotal.

Note: Report capital gain distributions onSchedule D (Form 1041), line 10.

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.

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Line 4Capital Gain or (Loss)

Enter the gain from Schedule D (Form1041), Part III, line 17, column (c); or theloss from Part IV, line 18.Note: Do not substitute Schedule D(Form 1040) for Schedule D (Form 1041).

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

Line 8Other Income

Enter other items of income not included

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

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

Deductions

Amortization, Depletion, andDepreciation

A trust or decedent's estate is allowed adeduction for amortization, depletion, anddepreciation only to the extent thedeductions are not apportioned to thebeneficiaries.

For a decedent's estate, thedepreciation 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 incomebeneficiaries and the trust on the basis ofthe trust income allocable to each, unlessthe governing instrument (or local law)requires or permits the trustee to maintaina depreciation reserve. If the trustee isrequired to maintain a reserve, thededuction is first allocated to the trust, upto the amount of the reserve. Any excess

is allocated among the beneficiaries in thesame manner as the trust's accountingincome. See Regulations section1.167(h)-1(b).

For mineral or timber property held bya decedent's estate, the depletiondeduction is apportioned between theestate and the heirs, legatees, anddevisees on the basis of the estate'sincome from such property allocable toeach.

For mineral or timber property held intrust, the depletion deduction isapportioned between the incomebeneficiaries and the trust based on thetrust income from such property allocable

to 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).

The deduction for amortization isapportioned between an estate or trustand its beneficiaries under the sameprinciples for apportioning the deductionsfor depreciation and depletion.

An estate or trust is not allowed to

make an election under section 179 toexpense certain tangible property.

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

The estate's or trust's share ofamortization, depletion, and depreciationshould 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.

Allocation of Deductions for

Tax-Exempt IncomeGenerally, 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); and

q 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 Allowablefor Estate Tax Purposes

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

Limitations on Deductions

At-Risk Loss Limitations

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

Passive Activity Loss and CreditLimitations

Section 469 and the regulationsthereunder generally limit losses frompassive activities to the amount of incomederived from all passive activities.Similarly, credits from passive activities

are generally limited to the tax attributableto such activities. These limitations arefirst applied at the estate or 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).

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

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Generally, rental activities are passiveactivities, whether or not the taxpayermaterially participates. However, certaintaxpayers who materially participate inreal property trades or businesses are notsubject to the passive activity limitationson losses from rental real estate activitiesin which they materially participate. Formore details, see section 469(c)(7).Note: Material participation standards forestates and trusts had not beenestablished by regulations at the time

these instructions went to print.For tax years of an estate ending less

than 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 is allowed.Any excess losses and/or credits aresuspended for the year and carriedforward.

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.

Portfolio income is not treated asincome from a passive activity, andpassive losses and credits generally maynot be applied to offset it. Portfolio incomegenerally includes interest, dividends,royalties, and income from annuities.Portfolio income of an estate or trust mustbe accounted for separately.

See Form 8582, Passive Activity LossLimitations, to figure the amount of lossesallowed from passive activities. See Form

8582-CR, Passive Activity CreditLimitations, to figure the amount of creditallowed for the current year.

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 any trust;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; and5. 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.

Line 10Interest

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

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

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

Personal interest is not deductible.Examples of personal interest includeinterest paid on:q Revolving charge accounts.q Personal notes for money borrowedfrom a bank, credit union, or other person.q Installment loans on personal useproperty.

q Underpayments of Federal, state, orlocal income taxes.

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

Types of interest to include on line 10are:1. Any investment interest (subject tolimitations);2. Any qualified residence interest; and

3. Any interest payable under section6601 on any unpaid portion of the estatetax attributable to the value of areversionary or remainder interest inproperty, or an interest in a closely heldbusiness for the period during which anextension of time for payment of such taxis in effect.Investment interest. Generally,investment interest is interest (includingamortizable bond premium on taxablebonds acquired after October 22, 1986,but before January 1, 1988) that is paidor incurred on indebtedness that isproperly allocable to property held forinvestment. Investment interest does notinclude any qualified residence interest,or interest that is taken into account undersection 469 in figuring income or loss froma passive activity.

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

The amount of the investment interestdeduction may be limited. Use Form4952, Investment Interest Expense

Deduction, to figure the allowableinvestment interest deduction.

If you must complete Form 4952, checkthe box on line 10 and attach Form 4952.Then, add the deductible investmentinterest to the other types of deductibleinterest and enter the total on line 10.Qualified residence interest. Interestpaid or incurred by an estate or trust onindebtedness secured by a qualifiedresidence of a beneficiary of an estate ortrust is treated as qualified residence

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

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

Line 11Taxes

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

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

Do not deduct:q Federal income taxes.q Estate, inheritance, legacy, succession,and gift taxes.q Federal duties and excise taxes.q State and local sales taxes. Instead,treat these taxes as part of the cost of the

property.

Line 12Fiduciary Fees

Enter the deductible fees paid or incurredto the fiduciary for administering theestate or trust during the tax year.Note: Fiduciary fees deducted on Form706 cannot be deducted on Form 1041.

Line 15aOther Deductions NOTSubject to the 2% Floor

Attach your own schedule, listing by typeand amount, all allowable deductions thatare not deductible elsewhere on Form1041.

Do not include any losses on worthlessbonds and similar obligations andnonbusiness bad debts. Report theselosses on Schedule D (Form 1041).

Do not deduct medical or funeralexpenses on Form 1041. Medicalexpenses of the decedent paid by theestate may be deductible on thedecedent's income tax return for the yearincurred. See section 213(c). Funeralexpenses are deductible ONLY on Form706.

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The following are examples ofdeductions that are reported on line 15a.Bond premium(s). For taxable bondsacquired before October 23, 1986, if thefiduciary elected to amortize the premium,report the amortization on this line. Fortax-exempt bonds, the amortizationcannot be deducted. In all cases wherethe fiduciary has made an election toamortize the premium, the basis must bereduced by the amount of amortization.

For more information, see section 171

and Pub. 550.If you claim a bond premium deduction

for the estate or trust, figure the deductionon a separate sheet and attach it to Form1041.Casualty and theft losses. Use Form4684, Casualties and Thefts, to figure anydeductible casualty and theft losses.Deduction for clean-fuel vehicles.Section 179A allows a deduction for partof the cost of qualified clean-fuel vehicleproperty. Get Pub. 535, BusinessExpenses, for more details.Net operating loss deduction(NOLD). An estate or trust is allowedthe net operating loss deduction (NOLD)under section 172.

If you claim an NOLD for the estate ortrust, figure the deduction on a separatesheet and attach it to this return.Estate's or trust's share ofamortization, depreciation, anddepletion not claimed elsewhere. Ifyou cannot deduct the amortization,depreciation, and depletion as rent orroyalty expenses on Schedule E (Form1040), or as business or farm expenseson Schedule C, C-EZ, or F (Form 1040),itemize the fiduciary's share of thedeductions on an attached sheet andinclude them on line 15a. Itemize eachbeneficiary's share of the deductions andreport them on the appropriate line ofSchedule K-1 (Form 1041).

Line 15bAllowableMiscellaneous ItemizedDeductions Subject to the 2% Floor

Miscellaneous itemized deductions aredeductible only to the extent that theaggregate amount of such deductionsexceeds 2% of adjusted gross income(AGI).

Miscellaneous itemized deductions donot include deductions for:q Interest under section 163.q Taxes under section 164.q The amortization of bond premiumunder section 171.q Estate taxes attributable to income inrespect of a decedent under section691(c).

For other exceptions, see section 67(b).For estates and trusts, the AGI is

figured by subtracting the following fromtotal income on line 9 of page 1:1. The administration costs of theestate or trust (the total of lines 12, 14,and 15a to the extent they are costsincurred in the administration of the estate

or trust) that would not have beenincurred if the property were NOT held bythe estate or trust;2. The income distribution deduction(line 18);3. The amount of the exemption (line20);4. The deduction for clean-fuel vehiclesclaimed on line 15a; and5. The net operating loss deductionclaimed on line 15a.

For those estates and trusts whoseincome distribution deduction is limited tothe actual distribution, and NOT the DNI(i.e., the income distribution is less thanthe DNI), when computing the AGI, usethe amount of the actual distribution.

For those estates and trusts whoseincome distribution deduction is limited tothe DNI (i.e., the actual distributionexceeds the DNI), the DNI must befigured taking into account the allowablemiscellaneous itemized deductions(AMID) after application of the 2% floor.In this situation there are two unknownamounts: (a) the AMID; and (b) the DNI.

The following example illustrates how

an algebraic equation can be used tosolve for these unknown amounts:The Malcolm Smith Trust, a complex

trust, earned $20,000 of dividend income,$20,000 of capital gains, and a fullydeductible $5,000 loss from XYZpartnership (chargeable to corpus) in1996. The trust instrument provides thatcapital gains are added to corpus. 50%of the fiduciary fees are allocated toincome and 50% to corpus. The trustclaimed a $2,000 deduction on line 12 ofForm 1041. The trust incurred $1,500 ofmiscellaneous itemized deductions(chargeable to income), which are subjectto the 2% floor. There are no otherdeductions. The trustee made adiscretionary distribution of the accountingincome of $17,500 to the trust's solebeneficiary.

Because the actual distribution canreasonably be expected to exceed theDNI, the trust must figure the DNI, takinginto account the allowable miscellaneousitemized deductions, to determine theamount to enter on line 15b.

The trust also claims an exemption of$100 on line 20.

To compute line 15b, use the equationbelow:

AMID = total miscellaneous itemizeddeductions (.02(AGI))

In the above example:AMID = 1,500 (.02(AGI))In all situations, use the following

equation to compute the AGI:AGI = (line 9) (the total of lines 12,

14, and 15a to the extent they are costsincurred in the administration of the estateor trust that would not have been incurredif the property were NOT held by theestate or trust) (line 18) (line 20).Note: There are no other deductionsclaimed by the trust on line 15a that aredeductible in arriving at AGI.

In the above example:AGI = 35,000 2,000 DNI 100Since the value of line 18 is not known

because it is limited to the DNI, you areleft with the following:

AGI = 32,900 DNISubstitute the value of AGI in the

equation:AMID = 1,500 (.02(32,900 DNI))The equation cannot be solved until the

value of DNI is known. The DNI can be

expressed in terms of the AMID. To dothis, compute the DNI using the knownvalues. In this example, the DNI is equalto the total income of the trust (less anycapital gains allocated to corpus; or plusany capital loss from line 4); less totaldeductions from line 16 (excluding anymiscellaneous itemized deductions); lessthe AMID.

Thus, DNI = (line 9) (line 17, column(b) of Schedule D (Form 1041)) (line 16)

(AMID)Substitute the known values:DNI = 35,000 20,000 2,000 AMIDDNI = 13,000 AMIDSubstitute the value of DNI in the

equation to solve for AMID:AMID = 1,500 (.02(32,900 (13,000

AMID)))AMID = 1,500 (.02(32,900 13,000

+ AMID))AMID = 1,500 (658 260 + .02 AMID)AMID = 1,102 .02AMID1.02AMID = 1,102AMID = 1,080DNI = 11,920 (i.e., 13,000 1,080)AGI = 20,980 (i.e., 32,900 11,920)

Note: The income distribution deductionis equal to the smaller of the distribution($17,500) or the DNI ($11,920).

Enter the value of AMID on line 15b(the DNI should equal line 9 of ScheduleB) and complete the rest of Form 1041according to the instructions.

If the 2% floor is more than thedeductions subject to the 2% floor, nodeductions are allowed.

Line 18Income DistributionDeduction

If the estate or trust was required todistribute income currently or if it paid,credited, or was required to distribute anyother amounts to beneficiaries during thetax year, complete Schedule B todetermine the estate's or trust's income

distribution deduction. However, if you arefiling for a pooled income fund, do notcomplete Schedule B. Instead, attach astatement to support the computation ofthe income distribution deduction. If theestate or trust claims an incomedistribution deduction, complete andattach:q Parts I and II of Schedule I to refigurethe deduction on a minimum tax basis;ANDq Schedule K-1 (Form 1041) for eachbeneficiary to which a distribution wasmade or required to be made.

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Cemetery perpetual care fund. Online 18, deduct the amount, not more than$5 per gravesite, paid for maintenance ofcemetery property. To the right of theentry space for line 18, enter the numberof gravesites. Also write Section 642(i)trust in parentheses after the trust'sname at the top of Form 1041. You do nothave to complete Schedules B of Form1041 and K-1 (Form 1041).

Line 19Estate Tax Deduction

(Including Certain Generation-Skipping Transfer Taxes)

If the estate or trust includes income inrespect of a decedent (IRD) in its grossincome, and such amount was includedin the decedent's gross estate for estatetax purposes, the estate or trust is allowedto deduct in the same tax year that portionof the estate tax imposed on thedecedent's estate that is attributable tothe inclusion of the IRD in the decedent'sestate. For an example of thecomputation, see Regulations section1.691(c)-1 and Pub. 559.

If any amount properly paid, credited,or required to be distributed by an estate

or trust to a beneficiary consists of IRDreceived by the estate or trust, do notinclude such amounts in determining theestate tax deduction for the estate or trust.Figure the deduction on a separate sheet.Attach the sheet to your return. Also, adeduction is allowed for the GST taximposed as a result of a taxabletermination, or a direct skip occurring asa result of the death of the transferor. Seesection 691(c)(3). Enter the estate's ortrust's share of these deductions on line19.

Line 20Exemption

Decedents' estates. A decedent's

estate is allowed a $600 exemption.Trusts. A trust whose governinginstrument requires that all income bedistributed currently is allowed a $300exemption, even if it distributed amountsother than income during the tax year. Allother trusts are allowed a $100exemption. See Regulations section1.642(b)-1.

Tax and Payments

Line 22Taxable Income

Net operating loss. If line 22 is a loss,the estate or trust may have a netoperating loss (NOL). Do not include thedeductions claimed on lines 13, 18, and20 when figuring the amount of the NOL.An NOL generally may be carried back tothe 3 prior tax years and forward to thefollowing 15 tax years. CompleteSchedule A of Form 1045, Application forTentative Refund, to figure the amount ofthe NOL that is available for carryback orcarryover. Use Form 1045 or file anamended return to apply for a refundbased on an NOL carryback. For moreinformation, get Pub. 536, Net OperatingLosses.

On the termination of the estate or trust,any unused NOL carryover that would beallowable to the estate or trust in a latertax year, but for the termination, isallowed to the beneficiaries succeeding tothe property of the estate or trust. See theinstructions for Schedule K-1, lines 12dand 12e.Excess deductions on termination. Ifthe estate or trust has for its final yeardeductions (excluding the charitablededuction and exemption) in excess of its

gross income, the excess is allowed asan itemized deduction to the beneficiariessucceeding to the property of the estateor trust. However, an unused NOLcarryover that is allowed to beneficiaries(as explained in the above paragraph)cannot also be treated as an excessdeduction.

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