Special Reporting Instructions

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Special Reporting Instructions

Grantor type trusts, the S portion of electing small business trusts (ESBTs), and bankruptcy estates all have reporting requirements that are significantly different than other Subchapter J trusts and decedent's estates. Additionally, grantor type trusts have optional filing methods available. Pooled income funds have many similar reporting requirements that other Subchapter J trusts (other than grantor type trusts and electing small business trusts) have but there are some very important differences. These reporting differences and optional filing methods are discussed below by entity.

Grantor Type Trusts

A trust is a grantor trust if the grantor retains certain powers or ownership benefits. This can also apply to only a portion of a trust. See Grantor Type Trust, later, for details on what makes a trust a grantor trust.

In general, a grantor trust is ignored for income tax purposes and all of the income, deductions, etc., are treated as belonging directly to the grantor. This also applies to any portion of a trust that is treated as a grantor trust.

Note.

If only a portion of the trust is a grantor type trust, indicate both grantor trust and the other type of trust, for example, simple or complex trust, as the type of entities checked in Section A on page 1 of Form 1041.

The following instructions apply only to grantor type trusts that are not using an optional filing method.

How to report. If the entire trust is a grantor trust, fill in only the entity information of Form 1041. Do not show any dollar amounts on the form itself; show dollar amounts only on an attachment to the form. Do not use Schedule K-1 (Form 1041) as the attachment.

If only part of the trust is a grantor type trust, the portion of the income, deductions, etc., that is allocable to the non-grantor part of the trust is reported on Form 1041, under normal reporting rules. The amounts that are allocable directly to the grantor are shown only on an attachment to the form. Do not use Schedule K-1 (Form 1041) as the attachment. However, Schedule K-1 is used to reflect any income distributed from the portion of the trust that is not taxable directly to the grantor or owner.

The fiduciary must give the grantor (owner) of the trust a copy of the attachment.

Attachment.

On the attachment, show:

  • The name, identifying number, and address of the person(s) to whom the income is taxable;

  • The income of the trust that is taxable to the grantor or another person under sections 671 through 678. Report the income in the same detail as it would be reported on the grantor's return had it been received directly by the grantor; and

  • Any deductions or credits that apply to this income. Report these deductions and credits in the same detail as they would be reported on the grantor's return had they been received directly by the grantor.

The income taxable to the grantor or another person under sections 671 through 678 and the deductions and credits that apply to that income must be reported by that person on their own income tax return.

Example.

The John Doe Trust is a grantor type trust. During the year, the trust sold 100 shares of ABC stock for $1,010 in which it had a basis of $10 and 200 shares of XYZ stock for $10 in which it had a $1,020 basis.

The trust does not report these transactions on Form 1041. Instead, a schedule is attached to the Form 1041 showing each stock transaction separately and in the same detail as John Doe (grantor and owner) will need to report these transactions on his Form 8949, Sales and Other Dispositions of Capital Assets and Schedule D (Form 1040). The trust does not net the capital gains and losses, nor does it issue John Doe a Schedule K-1 (Form 1041) showing a $10 long-term capital loss.

QSSTs. Income allocated to S corporation stock held by the trust is treated as owned by the income beneficiary of the portion of the trust that owns the stock. Report this income following the rules discussed above for grantor type trusts. A QSST cannot elect any of the optional filing methods discussed below.

However, the trust, and not the income beneficiary, is treated as the owner of the S corporation stock for figuring and attributing the tax results of a disposition of the stock. For example, if the disposition is a sale, the QSST election ends as to the stock sold and any gain or loss recognized on the sale will be that of the trust. For more information on QSSTs, see Regulations section 1.1361-1(j).

Optional Filing Methods for Certain Grantor Type Trusts

Generally, if a trust is treated as owned by one grantor or other person, the trustee may choose Optional Method 1 or Optional Method 2 as the trust's method of reporting instead of filing Form 1041. A husband and wife will be treated as one grantor for purposes of these two optional methods if:

  • All of the trust is treated as owned by the husband and wife, and

  • The husband and wife file their income tax return jointly for that tax year.

Generally, if a trust is treated as owned by two or more grantors or other persons, the trustee may choose Optional Method 3 as the trust's method of reporting instead of filing Form 1041.

Once you choose the trust's filing method, you must follow the rules under Changing filing methods if you want to change to another method.

Exceptions. The following trusts cannot report using the optional filing methods.
  • A common trust fund (as defined in section 584(a)).

  • A foreign trust or a trust that has any of its assets located outside the United States.

  • A qualified subchapter S trust (as defined in section 1361(d)(3)).

  • A trust all of which is treated as owned by one grantor or one other person whose tax year is other than a calendar year.

  • A trust all of which is treated as owned by one or more grantors or other persons, one of which is not a U.S. person.

  • A trust all of which is treated as owned by one or more grantors or other persons if at least one grantor or other person is an exempt recipient for information reporting purposes, unless at least one grantor or other person is not an exempt recipient and the trustee reports without treating any of the grantors or other persons as exempt recipients.

Optional Method 1. For a trust treated as owned by one grantor or by one other person, the trustee must give all payers of income during the tax year the name and TIN of the grantor or other person treated as the owner of the trust and the address of the trust. This method may be used only if the owner of the trust provides the trustee with a signed Form W-9, Request for Taxpayer Identification Number and Certification. In addition, unless the grantor or other person treated as owner of the trust is the trustee or a co-trustee of the trust, the trustee must give the grantor or other person treated as owner of the trust a statement that:
  • Shows all items of income, deduction, and credit of the trust;

  • Identifies the payer of each item of income;

  • Explains how the grantor or other person treated as owner of the trust takes those items into account when figuring the grantor's or other person's taxable income or tax; and

  • Informs the grantor or other person treated as the owner of the trust that those items must be included when figuring taxable income and credits on his or her income tax return.

Grantor trusts that have not applied for an EIN and are going to file under Optional Method 1 do not need an EIN for the trust as long as they continue to report under that method.

Optional Method 2. For a trust treated as owned by one grantor or by one other person, the trustee must give all payers of income during the tax year the name, address, and TIN of the trust. The trustee also must file with the IRS the appropriate Forms 1099 to report the income or gross proceeds paid to the trust during the tax year that shows the trust as the payer and the grantor, or other person treated as owner, as the payee. The trustee must report each type of income in the aggregate and each item of gross proceeds separately. The due date for any Forms 1099 required to be filed with the IRS by a trustee under this method is February 28, 2013 (April 1, 2013, if filed electronically).

In addition, unless the grantor, or other person treated as owner of the trust, is the trustee or a co-trustee of the trust, the trustee must give the grantor or other person treated as owner of the trust a statement that:

  • Shows all items of income, deduction, and credit of the trust;

  • Explains how the grantor or other person treated as owner of the trust takes those items into account when figuring the grantor's or other person's taxable income or tax; and

  • Informs the grantor or other person treated as the owner of the trust that those items must be included when figuring taxable income and credits on his or her income tax return. This statement satisfies the requirement to give the recipient copies of the Forms 1099 filed by the trustee.

Optional Method 3. For a trust treated as owned by two or more grantors or other persons, the trustee must give all payers of income during the tax year the name, address, and TIN of the trust. The trustee also must file with the IRS the appropriate Forms 1099 to report the income or gross proceeds paid to the trust by all payers during the tax year attributable to the part of the trust treated as owned by each grantor, or other person, showing the trust as the payer and each grantor, or other person treated as owner of the trust, as the payee. The trustee must report each type of income in the aggregate and each item of gross proceeds separately. The due date for any Forms 1099 required to be filed with the IRS by a trustee under this method is February 28, 2013 (April 1, 2013, if filed electronically).

In addition, the trustee must give each grantor or other person treated as owner of the trust a statement that:

  • Shows all items of income, deduction, and credit of the trust attributable to the part of the trust treated as owned by the grantor or other person;

  • Explains how the grantor or other person treated as owner of the trust takes those items into account when figuring the grantor's or other person's taxable income or tax; and

  • Informs the grantor or other person treated as the owner of the trust that those items must be included when figuring taxable income and credits on his or her income tax return. This statement satisfies the requirement to give the recipient copies of the Forms 1099 filed by the trustee.

Changing filing methods. A trustee who previously had filed Form 1041 can change to one of the optional methods by filing a final Form 1041 for the tax year that immediately precedes the first tax year for which the trustee elects to report under one of the optional methods. On the front of the final Form 1041, the trustee must write “Pursuant to section 1.671-4(g), this is the final Form 1041 for this grantor trust,” and check the Final return box in item F.

For more details on changing reporting methods, including changes from one optional method to another, see Regulations section 1.671-4(g).

Backup withholding. The following grantor trusts are treated as payors for purposes of backup withholding.
  1. A trust established after 1995, all of which is owned by two or more grantors (treating spouses filing a joint return as one grantor).

  2. A trust with 10 or more grantors established after 1983 but before 1996.

The trustee must withhold a certain percentage of reportable payments made to any grantor who is subject to backup withholding.

For more information, see section 3406 and its regulations.

Pooled Income Funds

If you are filing for a pooled income fund, attach a statement to support the following:

  • The calculation of the yearly rate of return,

  • The computation of the deduction for distributions to the beneficiaries, and

  • The computation of any charitable deduction.

See section 642 and the regulations thereunder for more information.

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

Also, you must file Form 5227, Split-Interest Trust Information Return, for the pooled income fund. However, if all amounts were transferred in trust before May 27, 1969, or if an amount was transferred to the trust after May 26, 1969, for which no deduction was allowed under any of the sections listed under section 4947(a)(2), then Form 5227 does not have to be filed.

Note.

Form 1041-A is no longer filed by pooled income funds.

Electing Small Business Trusts (ESBTs)

Special rules apply when figuring the tax on the S portion of an ESBT. The S portion of an ESBT is the portion of the trust that consists of stock in one or more S corporations and is not treated as a grantor type trust. The tax on the S portion:

  • Must be figured separately from the tax on the remainder of the ESBT (if any) and attached to the return,

  • Is entered to the left of the Schedule G, line 7, entry space preceded by “Sec. 641(c),” and

  • Is included in the total tax on Schedule G, line 7.

The tax on the remainder (non-S portion) of the ESBT is figured in the normal manner on Form 1041.

Tax computation attachment. Attach to the return the tax computation for the S portion of the ESBT.

To compute the tax on the S portion:

  • Treat that portion of the ESBT as if it were a separate trust;

  • Include only the income, losses, deductions, and credits allocated to the ESBT as an S corporation shareholder and gain or loss from the disposition of S corporation stock;

  • Aggregate items of income, losses, deductions, and credits allocated to the ESBT as an S corporation shareholder if the S portion of the ESBT has stock in more than one S corporation;

  • Deduct state and local income taxes and administrative expenses directly related to the S portion or allocated to the S portion if the allocation is reasonable in light of all the circumstances;

  • Deduct interest expense paid or accrued on indebtedness incurred to acquire stock in an S corporation;

  • Do not claim a deduction for capital losses in excess of capital gains;

  • Do not claim an income distribution deduction or an exemption amount;

  • Do not claim an exemption amount in figuring the AMT; and

  • Do not use the tax rate schedule to figure the tax. The tax is 35% of the S portion's taxable income except in figuring the maximum tax on qualified dividends and capital gains.

For additional information, see Regulations section 1.641(c)-1.

Other information. When figuring the tax and DNI on the remaining (non-S) portion of the trust, disregard the S corporation items.

Do not apportion to the beneficiaries any of the S corporation items.

If the ESBT consists entirely of stock in one or more S corporations, do not make any entries on lines 1–22
of page 1. Instead:

  • Complete the entity portion;

  • Follow the instructions above for figuring the tax on the S corporation items;

  • Carry the tax from line 7 of Schedule G to line 23 on page 1; and

  • Complete the rest of the return.

The grantor portion (if any) of an ESBT will follow the rules discussed under Grantor Type Trusts, earlier.

Bankruptcy Estates

The bankruptcy estate that is created when an individual debtor files a petition under either chapter 7 or 11 of title 11 of the U.S. Code is treated as a separate taxable entity. The bankruptcy estate is administered by a trustee or a debtor-in-possession. If the case is later dismissed by the bankruptcy court, the individual debtor is treated as if the bankruptcy petition had never been filed.

A separate taxable entity is not created if a partnership or corporation files a petition under any chapter of title 11 of the U.S. Code.

For additional information about bankruptcy estates, see Pub. 908, Bankruptcy Tax Guide.

Who Must File

Every trustee (or debtor-in-possession) for an individual's bankruptcy estate under chapter 7 or 11 of title 11 of the U.S. Code must file a return if the bankruptcy estate has gross income of $9,750 or more for tax years beginning in 2012.

Failure to do so may result in an estimated Request for Administrative Expenses being filed by the IRS in the bankruptcy proceeding or a motion to compel filing of the return.

The filing of a tax return for the bankruptcy estate does not relieve the individual debtor(s) of his, her, or their individual tax obligations.

EIN

Every bankruptcy estate of an individual required to file a return must have its own EIN. The SSN of the individual debtor cannot be used as the EIN for the bankruptcy estate.

Accounting Period

A bankruptcy estate is allowed to have a fiscal year. However, this period cannot be longer than 12 months.

When To File

File Form 1041 on or before the 15th day of the 4th month following the close of the tax year. Use Form 7004 to apply for an automatic 6-month extension of time to file.

Disclosure of Return Information

Under section 6103(e)(5), tax returns of individual debtors who have filed for bankruptcy under chapters 7 or 11 of title 11 are, upon written request, open to inspection by or disclosure to the trustee.

The returns subject to disclosure to the trustee are those for the year the bankruptcy begins and prior years. Use Form 4506, Request for Copy of Tax Return, to request copies of the individual debtor's tax returns.

If the bankruptcy case was not voluntary, disclosure cannot be made before the bankruptcy court has entered an order for relief, unless the court rules that the disclosure is needed for determining whether relief should be ordered.

Transfer of Tax Attributes From the Individual Debtor to the Bankruptcy Estate

The bankruptcy estate succeeds to the following tax attributes of the individual debtor:

  1. Net operating loss (NOL)
    carryovers;

  2. Charitable contribution
    carryovers;

  3. Recovery of tax benefit items;

  4. Credit carryovers;

  5. Capital loss carryovers;

  6. Basis, holding period, and
    character of assets;

  7. Method of accounting;

  8. Unused passive activity losses;

  9. Unused passive activity credits;
    and

  10. Unused section 465 losses.

Income, Deductions, and Credits

Under section 1398(c), the taxable income of the bankruptcy estate generally is figured in the same manner as that of an individual. The gross income of the bankruptcy estate includes any income included in property of the estate as defined in title 11, sections 541 and 1115. Section 1115 was added to title 11 of the U.S. Code by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Section 1115 of title 11 of the U.S. Code expands the definition of property of the estate in chapter 11 cases filed by individuals after October 16, 2005, and in chapter 11 cases begun by creditors against an individual debtor (involuntary cases) after that date. Under section 1115 of title 11 of the U.S. Code, property of the bankruptcy estate includes (a) earnings from services performed by the debtor after the beginning of the case (both wages and self-employment income) and before the case is closed, dismissed, or converted to a case under a different chapter and (b) property described in section 541 of title 11 of the U.S. Code and income earned therefrom that the debtor acquires after the beginning of the case and before the case is closed, dismissed, or converted. If section 1115 of title 11 of the U.S. Code applies, the bankruptcy estate's gross income includes, as described above, (a) the debtor's earnings from services performed after the beginning of the case and (b) the income from property acquired after the beginning of the case.

The income from property owned by the debtor when the case began is also included in the bankruptcy estate's gross income. However, if this property is exempted from the bankruptcy estate or is abandoned by the trustee or debtor-in-possession, the income from the property is not included in the bankruptcy estate's gross income. Also included in income is gain from the sale of the bankruptcy estate's property. To figure gain, the trustee or debtor-in-possession must determine the correct basis of the property.

To determine whether any amount paid or incurred by the bankruptcy estate is allowable as a deduction or credit, or is treated as wages for employment tax purposes, treat the amount as if it were paid or incurred by the individual debtor in the same trade or business or other activity the debtor engaged in before the bankruptcy proceedings began.

Administrative expenses. The bankruptcy estate is allowed a deduction for any administrative expense allowed under section 503 of title 11 of the U.S. Code, and any fee or charge assessed under chapter 123 of title 28 of the U.S. Code, to the extent not disallowed under an Internal Revenue Code provision (for example, section 263, 265, or 275).

Administrative expense loss. When figuring an NOL, nonbusiness deductions (including administrative expenses) are limited under section 172(d)(4) to the bankruptcy estate's nonbusiness income. The excess nonbusiness deductions are an administrative expense loss that may be carried back to each of the 3 preceding tax years and forward to each of the 7 succeeding tax years of the bankruptcy estate. The amount of an administrative expense loss that may be carried to any tax year is determined after the NOL deductions allowed for that year. An administrative expense loss is allowed only to the bankruptcy estate and cannot be carried to any tax year of the individual debtor.

Carryback of NOLs and credits. If the bankruptcy estate itself incurs an NOL (apart from losses carried forward to the estate from the individual debtor), it can carry back its NOLs not only to previous tax years of the bankruptcy estate, but also to tax years of the individual debtor prior to the year in which the bankruptcy proceedings began. Excess credits, such as the foreign tax credit, also may be carried back to pre-bankruptcy years of the individual debtor.

Exemption. For tax years beginning in 2012, a bankruptcy estate is allowed a personal exemption of $3,800.

Standard deduction. For tax years beginning in 2012, a bankruptcy estate that does not itemize deductions is allowed a standard deduction of $5,950.

Discharge of indebtedness. In a title 11 case, gross income does not include amounts that normally would be included in gross income resulting from the discharge of indebtedness. However, any amounts excluded from gross income must be applied to reduce certain tax attributes in a certain order. Attach Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), to show the reduction of tax attributes.

Tax Rate Schedule

Figure the tax for the bankruptcy estate using the tax rate schedule below. Enter the tax on Form 1040, line 44.

If taxable income is:
Over— But not over— The tax is: Of the amount over—
$0 $8,700 10% $0
8,700 35,350 $870.00 + 15% 8,700
35,350 71,350 4,867.50 + 25% 35,350
71,350 108,725 13,867.50 + 28% 71,350
108,725 194,175 24,332.50 + 33% 108,725
194,175 ------ 52,531.00 + 35% 194,175

Prompt Determination of Tax Liability

To request a prompt determination of the tax liability of the bankruptcy estate, the trustee or debtor-in-possession must file a written request for the determination with the IRS. The request must be submitted in duplicate and executed under penalties of perjury. The request must include a statement indicating that it is a request for prompt determination of tax liability and: (a) the return type, and all the tax periods for which prompt determination is sought; (b) the name and location of the office where the return was filed; (c) the debtor's name; (d) the debtor's SSN, TIN, or EIN; (e) the type of bankruptcy estate; (f) the bankruptcy case number; and (g) the court where the bankruptcy is pending. Send the request to the Centralized Insolvency Operation, P.O. Box 7346, Philadelphia, PA 19101-7436 (marked “Request for Prompt Determination”).

The IRS will notify the trustee or debtor-in-possession within 60 days from receipt of the request if the return filed by the trustee or debtor-in-possession has been selected for examination or has been accepted as filed. If the return is selected for examination, it will be examined as soon as possible. The IRS will notify the trustee or debtor-in-possession of any tax due within 180 days from receipt of the request or within any additional time permitted by the bankruptcy court.

See Rev. Proc. 2006-24, 2006-22 I.R.B. 943, available at www.irs.gov/irb/2006-22_IRB/ar12.html, modified by Announcement 2011–77, available at www.irs.gov/irb/2011-51_IRB/ar13.

Special Filing Instructions for Bankruptcy Estates

Use Form 1041 only as a transmittal for Form 1040. In the top margin of Form 1040 write “Attachment to Form 1041. DO NOT DETACH.” Attach Form 1040 to Form 1041. Complete only the identification area at the top of Form 1041. Enter the name of the individual debtor in the following format: “John Q. Public Bankruptcy Estate.” Beneath, enter the name of the trustee in the following format: “Avery Snow, Trustee.” In item D, enter the date the petition was filed or the date of conversion to a chapter 7 or 11 case.

Enter on Form 1041, line 23, the total tax from line 61 of Form 1040. Complete lines 24 through 29 of Form 1041, and sign and date it.

In a chapter 11 case filed after October 16, 2005, the bankruptcy estate's gross income may be affected by section 1115 of title 11 of the U.S. Code. See Income, Deductions, and Credits earlier. The debtor may receive a Form W-2, 1099-INT, 1099-DIV, or 1099-MISC or other information return reporting wages or other income to the debtor for the entire year, even though some or all of this income is includible in the bankruptcy estate's gross income under section 1115 of title 11 of the U.S. Code. If this happens, the income reported to the debtor on the Form W-2 or 1099, or other information return (and the withheld income tax shown on these forms) must be reasonably allocated between the debtor and the bankruptcy estate. The debtor-in-possession (or the chapter 11 trustee, if one was appointed) must attach a schedule that shows (a) all the income reported on the Form W-2, Form 1099, or other information return, (b) the portion of this income includible in the bankruptcy estate's gross income, and (c) all the withheld income tax, if any, and the portion of withheld tax reasonably allocated to the bankruptcy estate. Also, the debtor-in-possesion (or the chapter 11 trustee, if one was appointed) must attach a copy of the Form W-2, if any, issued to the debtor for the tax year if the Form W-2 reports wages to the debtor and some or all of the wages are includible in the bankruptcy estate's gross income because of section 1115 of title 11 of the U.S. Code. For more details, including acceptable allocation methods, see Notice 2006-83, 2006-40 I.R.B. 596, available at www.irs.gov/irb/2006-40_IRB/ar12.html.