U.S. Income Tax Return for Settlement Funds (Under Section 468B)

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Instructions for Form 1120-SF

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Instructions for
Form 1120-SF

Department of the Treasury
Internal Revenue Service

(Rev. February 2007)
U.S. Income Tax Return for Settlement Funds
Section references are to the Internal
Revenue Code unless otherwise noted.

What’s New

• The address for filing a return for a fund
whose principal business, office, or agency
is located in a foreign country or U.S.
possession has changed. See Where to File
on page 2.
• Settlement funds created after May 17,
2006, for the purpose of resolving or
satisfying liabilities under the
Comprehensive Environmental Response,
Compensation, and Liability Act of 1980
(CERCLA) are exempt from tax.
• For its 2006 tax year only, a settlement
fund that paid the federal telephone excise
tax on long distance or bundled services
billed after February 28, 2003, and before
August 1, 2006, may be able to request a
credit. Use line 16f to write in the requested
amount. See the instructions for line 16.
• For qualified settlement funds established
before February 4, 2006, a transferor may
elect grantor trust treatment under section
671, if the applicable period of limitation of
filing an amended return has not expired for
both the qualified settlement fund’s first tax
year and all subsequent tax years and the
transferor’s corresponding tax year or years.
See Regulations section 1.468B-1(c).

General Instructions
Purpose of Form
Use Form 1120-SF, U.S. Income Tax
Return for Settlement Funds, to report
transfers received, income earned,
deductions claimed, distributions made, and
to figure the income tax liability of a
designated or qualified settlement fund.

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

When To File
Generally, a settlement fund must file its
income tax return by the 15th day of the 3rd
month after the end of its tax year.
If the due date falls on a Saturday,
Sunday, or legal holiday, the fund may file
on the next business day.
Private delivery services. Settlement
funds can use certain private delivery
services designated by the IRS to meet the
timely mailing as “timely filing/paying” rule
for tax returns and payments. See the
Instructions for Form 1120, U.S. Corporation
Income Tax Return, for details.

Private delivery services cannot
deliver items to P.O. boxes. The fund
CAUTION must use the U.S. Postal Service to
mail any items to an IRS P.O. box address.
Extension of time to file. File Form 7004,
Application for Automatic 6-Month Extension
of Time To File Certain Business Income
Tax, Information, and Other Returns, to
request a 6-month extension of time to file.
Generally, file Form 7004 by the regular due
date of the return.

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Who Must Sign
The return must be signed and dated by the
administrator of the fund.
If an employee of the fund completes
Form 1120-SF, the paid preparer’s space
should remain blank. Anyone who prepares
Form 1120-SF but does not charge the fund
should not complete that section. Generally,
anyone who is paid to prepare the return
must sign it and fill in the “Paid Preparer’s
Use Only” area.
The paid preparer must complete the
required preparer information and:
• Sign the return in the space provided for
the preparer’s signature.
• Give a copy of the return to the
administrator.

Paid Preparer
Authorization
If the fund wants to allow the IRS to discuss
its tax return with the paid preparer who
signed it, check the “Yes” box in the
signature area of the return. This
authorization applies only to the individual
whose signature appears in the “Paid
Preparer’s Use Only” section of the fund’s
return. It does not apply to the firm, if any,
shown in that section.
The authorization will automatically end
no later that the due date (excluding
extensions) for filing the fund’s tax return for
the following year. If the fund wants to
expand the paid preparer’s authorization or
revoke the authorization before it ends, see
Publication 947, Practice Before the IRS
and Power of Attorney.

Assembling the Return
To ensure that the fund’s tax return is
processed correctly, attach all schedules in
alphabetical order and other forms in
numerical order after Form 1120-SF.
Complete every applicable entry space
on Form 1120-SF. Do not write “See
Attached” instead of completing the entry
spaces. If more space is needed on the
forms or schedules, attach separate sheets
using the same size and format as the
printed forms. If there are supporting
statements and attachments, arrange them
Cat. No. 14988X

in the same order as the schedules or forms
they support and attach them last. Show the
totals on the printed forms. Enter the fund’s
name and employer identification number
(EIN) on each supporting statement or
attachment.

Depository Method of Tax
Payment
Generally, the following apply to deposits of
tax payments.
• The fund must pay any tax due in full no
later than the 15th day of the 3rd month
after the end of the tax year.
• The fund must make electronic deposits
of all depository taxes (such as employment
tax, excise tax, and fund income tax) using
the Electronic Federal Tax Payment System
(EFTPS) after December 31 of the calendar
year following any calendar year in which
the fund deposited more than $200,000 of
such taxes. Once the fund is required to use
EFTPS, it must continue to use EFTPS in all
later years.
• If the fund is required to use EFTPS and
fails to do so, it may be subject to a 10%
penalty. If the fund is not required to use
EFTPS, it may participate voluntarily. To
enroll in or get more information about
EFTPS, call 1-800-555-4477. To enroll
online, visit www.eftps.gov.
• If the fund does not use EFTPS, deposit
fund income tax payments (and estimated
tax payments) with Form 8109, Federal Tax
Deposit Coupon. If the fund does not have a
preprinted Form 8109, use Form 8109-B to
make deposits. Get this form by calling
1-800-829-4933 or by visiting an IRS
taxpayer assistance center. Have the fund’s
EIN ready when calling or visiting.
For more information on deposits, see
the instructions for Form 8109 and
Publication 583, Starting a Business and
Keeping Records.
If the fund owes tax when it files
Form 1120-SF, do not include the
CAUTION payment with the tax return. Instead,
mail or deliver the payments with Form 8109
to an authorized depositary, or use EFTPS,
if applicable.

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Estimated Tax Payments
Generally, the following rules apply to the
fund’s payments of estimated tax.
• A fund must make installment payments
of estimated tax if it expects its total tax for
the year (less applicable credits) to be $500
or more.
• The installments are due by the 15th day
of the 4th, 6th, 9th, and 12th months of the
tax year. If any date falls on a Saturday,
Sunday, or legal holiday, the installment is
due on the next business day.

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Instructions for Form 1120-SF

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Rounding Off to Whole
Dollars

Where To File
File the fund’s return at the applicable IRS address listed below.
If the fund’s principal
business, office, or agency
is located in:

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

Connecticut, Delaware, District
of Columbia, Illinois, Indiana,
Kentucky, Maine, Maryland,
Massachusetts, Michigan, New
Hampshire, New Jersey, New
York, North Carolina, Ohio,
Pennsylvania, Rhode Island,
South Carolina, Vermont,
Virginia, West Virginia,
Wisconsin

Less than $10 million

Use the following Internal
Revenue Service Center
address:

Cincinnati, OH 45999-0012

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

Recordkeeping
$10 million or more

Ogden, UT 84201-0012

Alabama, Alaska, Arizona,
Arkansas, California, Colorado,
Florida, Georgia, Hawaii,
Idaho, Iowa, Kansas,
Louisiana, Minnesota,
Mississippi, Missouri, Montana,
Nebraska, Nevada, New
Mexico, North Dakota,
Oklahoma, Oregon, South
Dakota, Tennessee, Texas,
Utah, Washington, Wyoming

Any amount

Ogden, UT 84201-0012

A foreign country or U.S.
possession

Any Amount

P.O. Box 409101
Ogden, UT 84409

Keep the fund’s records for as long as they
may be needed for the administration of any
provision of the Internal Revenue Code.
Usually, records that support an item of
income, deduction, or credit on the return
must be kept for 3 years from the date the
return is due or filed, whichever is later.
Keep records that verify the fund’s basis in
property for as long as they are needed to
figure the basis of the original or
replacement property.
The fund should keep copies of all filed
returns. They help in preparing future and
amended returns.

Additional Information

• Use Form 1120-W, Estimated Tax for

Corporations, as a worksheet to compute
estimated tax. Complete Form 1120-W
according to its instructions. However, you
should multiply the expected modified gross
income (see instructions for line 14 on page
4) by the maximum corporate tax rate in
effect for the year. See section 11 for the
current year maximum corporate tax rate.
• If the fund does not use EFTPS, use the
deposit coupons (Forms 8109) to make
deposits of estimated tax. If the fund
overpaid estimated tax, it may be able to get
a quick refund by filing Form 4466,
Corporation Application for Quick Refund of
Overpayment of Estimated Tax. If the fund
overpaid estimated tax, it may be able to get
a quick refund by filing Form 4466,
Corporation Application for Quick Refund of
Overpayment of Estimated Tax.
For more information on estimated tax
payments, including penalties that apply if
the fund fails to make required payments,
see the instructions for line 17.

Interest and Penalties
Interest. Interest is charged on taxes paid
late even if an extension of time to file is
granted. Interest is also charged on
penalties imposed for failure to file,
negligence, fraud, substantial valuation
misstatements, substantial understatements
of tax, and reportable transaction
understatements from the due date
(including extensions) to the date of
payment. The interest charge is figured at a
rate determined under section 6621.
Penalties. A fund that does not file its tax
return by the due date, including extensions,

may be penalized 5% of the unpaid tax for
each month or part of a month the return is
late, up to a maximum of 25% of the unpaid
tax. A fund that does not pay the tax when
due generally may be penalized 1/2 of 1% of
the unpaid tax for each month or part of a
month the tax is not paid, up to a maximum
of 25% of the unpaid tax. These penalties
will not be imposed if the fund can show that
the failure to pay on time was due to
reasonable cause.
The trust and recovery penalty. This
penalty may apply if certain excise, income,
social security, and Medicare taxes that
must be collected or withheld are not
collected or withheld, or these taxes are not
paid. The trust fund recovery penalty may
be imposed on all persons who are
determined by the IRS to have been
responsible for collecting, accounting for,
and paying over these taxes, and who acted
willfully in not doing so. The penalty is equal
to the unpaid trust fund tax. See the
Instructions for Form 720 or Publication 15
(Circular E), Employer’s Tax Guide, for
details, including the definition of
responsible persons.
Other penalties can be imposed for
negligence, substantial understatement of
tax, reportable transaction understatements,
and fraud. See sections 6662, 6662A, and
6663.

Tax Year and Accounting
Method
A designated or qualified settlement fund’s
tax year is the calendar year and the fund
must use the accrual method of accounting.

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

Definitions
Qualified Settlement Fund
A fund, account, or trust (“a fund”) is a
qualified settlement fund if it meets the
following requirements:
• Governmental order or approval
requirement,
• Resolve or satisfy requirement, and
• Segregation requirement.
Governmental order or approval
requirement. To meet this requirement, the
fund must be ordered by, or approved by,
the United States, any state (including the
District of Columbia), territory, possession,
or political subdivision thereof, or any
agency or instrumentality (including a court
of law) of any of the foregoing, and it must
be subject to the continuing jurisdiction of
that governmental authority.
A fund is ordered by or approved by a
governmental authority when the authority
issues its initial or preliminary order to
establish, or grants its initial or preliminary
approval of, the fund even if that order or
approval may be subject to review or
revision. Generally, a governmental
authority’s order or approval has no
retroactive effect and does not permit a fund
to be a qualified settlement fund prior to the
date the order is issued or the approval is
granted. However, see Relation-back rule
below.
Arbitration panels. An arbitration award
that orders the establishment of, or
approves, a fund is an order or approval of a
governmental authority if:

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Instructions for Form 1120-SF

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• The arbitration award is judicially

enforceable;
• The arbitration award is issued following a
bona fide arbitration proceeding in
accordance with rules approved by a
governmental authority (such as
self-regulatory organization-administered
arbitration proceedings in the securities
industry); and
• The fund is subject to the continuing
jurisdiction of the arbitration panel, the court
of law that has jurisdiction to enforce the
arbitration award, or the governmental
authority that approved the rules of the
arbitration proceedings.
Resolve or satisfy requirement. To meet
this requirement, a fund must be established
to resolve or satisfy one or more contested
or uncontested claims that have resulted, or
may result, from an event (or a series of
related events) that has occurred and that
has given rise to at least one claim asserting
liability:
• Under the Comprehensive Environmental
Response, Compensation and Liability Act
of 1980 (CERCLA); as amended for
settlement funds created before May 18,
2006.
• Arising out of a tort, breach of contract, or
violation of law; or
• Designated by the IRS in a revenue ruling
or revenue procedure.
Generally, a fund does not meet the
resolve or satisfy requirement if it is
established to resolve or satisfy a liability to
provide property or services unless the
transferor’s obligation to provide property or
services is extinguished by a transfer or
transfers to the fund.
Note. Settlement Fund’s created after May
17, 2006, for the purpose of resolving or
satisfying liabilities under the CERCLA are
exempt from tax.
Segregation requirement. To meet this
requirement, the fund must (a) be a trust
under applicable state law or (b) keep its
assets segregated from other assets of the
transferor (and related persons). For
example, cash held by a transferor in a
separate bank account satisfies the
segregation requirement.
Classification of fund prior to meeting all
three requirements. If a fund meets the
resolve or satisfy requirement, the assets of
the fund are treated as owned by the
transferor of those assets until the fund also
meets the governmental order and the
segregation requirements. On the day the
fund meets all three requirements, the
transferor is treated as transferring the
assets to a qualified settlement fund.
Relation-back rule. If a fund meets the
resolve or satisfy requirement and the
segregation requirement before it meets the
governmental order or approval
requirement, the transferor and the
administrator (defined above) may jointly
elect the relation-back election (defined
below) to treat the fund as coming into
existence as a qualified settlement fund on
the later of (a) the date the fund meets the
resolve or satisfy requirement and the
segregation requirement or (b) January 1 of
the calendar year in which all three
requirements are satisfied.
If a relation-back election is made, the
assets held by the fund on the date the

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

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

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not meet the requirements of a designated
settlement fund but does meet the
requirements of a qualified settlement fund,
the fund is treated as a qualified settlement
fund.

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

Specific Instructions
Period Covered
A designated or qualified settlement fund’s
tax year is the calendar year.

Address
Include the suite, room, or other unit number
after the street address. If the Post Office
does not deliver mail to the street address
and the fund or the administrator has a P.O.
box, show the box number instead.

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

Final Return, Name
Change, Address Change,
or Amended Return
Indicate a final return, name change,
address change, or amended return by
checking the appropriate box. If a change in
address occurs after the return is filed, use
Form 8822, Change of Address, to notify the
IRS of the new address.

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Instructions for Form 1120-SF

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

Deductions
Do not deduct:
• Expenses allocable to tax-exempt income
(see section 265);
• Payments of claims made by the fund;
and
• Expenses incurred by, or on behalf of,
claimants or transferors.
Line 11. Other deductions. Enter the total
of other deductions not entered on lines 7
through 10. List the type and amount of
deduction on an attached schedule. If the
fund has only one item of other deduction,
describe it in parentheses on the dotted line
next to the entry space for line 11.
Line 12. Net operating loss deduction
(NOL). Enter the total NOL carryovers from
prior tax years, but do not enter more than
the fund’s taxable income. See Regulations
section 1.468B-2(b)(4) for details.

Part II. Tax Computation
Line 14. Modified gross income. Modified
gross income of a designated or qualified

settlement fund is its gross income, as
defined in section 61, computed with certain
modifications. See Regulations section
1.468B-2(b) for more information.
Line 16. Credits and payments.
Generally, no credits or payments are
allowed other than those on lines 16a
through 16e. However, for 2006, the
following apply.
Credit for federal telephone excise tax
paid. If the fund was billed after February
28, 2003, and before August 1, 2006, for the
federal telephone excise tax on long
distance or bundled service, the fund may
be able to request a credit for the tax paid.
The fund had bundled service if its local and
long distance service was provided under a
plan that does not separately state the
charge for local service. The fund cannot
request the credit if it has already received a
credit or refund from its service provider. If
the fund requests the credit, it cannot ask its
service provider for a credit or refund and
must withdraw any request previously
submitted to its provider.
The fund can request the credit by
attaching Form 8913, Credit for Federal
Telephone Excise Tax Paid, showing the
actual amount the fund paid. Include the
amount from line 16 of Form 8913 in the
total for line 16f of Form1120-SF. Enter
“TETR” in the space next to line 16f. Attach
Form 8913 to the fund’s 2006 Form
1120-SF or the return for the first tax year
that includes December 31, 2006. The fund
also may be able to request the credit based
on an estimate of the amount paid. See
Form 8913 for details. In either case, the
fund must keep records to substantiate the
amount of the credit requested.
Line 17. Estimated tax penalty. A fund
that does not make estimated tax payments
when due may be subject to an
underpayment penalty for the period of
underpayment. Generally, a fund is subject
to the penalty if its tax liability is $500 or
more and it did not timely pay the smaller of:
• Its current year tax liability or
• Its prior year’s tax.
See section 6655 for details and exceptions,
including special rules for large funds.
Use Form 2220, Underpayment of
Estimated Tax by Corporations, to see if the
fund owes a penalty and to figure the
amount of the penalty. Generally, the fund

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does not have to file this form because the
IRS can figure the amount of any penalty
and bill the fund for it. See Form 2220 for
other information that may apply.
If Form 2220 is attached, check the box
on line 17 and enter the amount of any
penalty on that line.
Paperwork Reduction Act Notice. We ask
for the information on this form to carry out
the Internal Revenue laws of the United
States. You are required to give us the
information. We need it to ensure that you
are complying with these laws and to allow
us to figure and collect the right amount of
tax. Section 6109 requires return preparers
to provide their identifying numbers on the
return.
You are not required to provide the
information requested on a form that is
subject to the Paperwork Reduction Act
unless the form displays a valid OMB control
number. Books or records relating to a form
or its instructions must be retained as long
as their contents may become material in
the administration of any Internal Revenue
law. Generally, tax returns and return
information are confidential, as required by
section 6103.
The time needed to complete and file this
form will vary depending on individual
circumstances. The estimated average time
is:
Recordkeeping . . . . . . . . .

18 hr., 24 min.

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

2 hr., 49 min.

Preparing the form . . . . . . .

5 hr., 6 min.

Copying, assembling, and
sending the form to the IRS

32 min.

If you have comments concerning the
accuracy of these time estimates or
suggestions for making this form simpler, we
would be happy to hear from you. You can
write to the Internal Revenue Service, Tax
Products Coordinating Committee,
SE:W:CAR:MP:T:T:SP, 1111 Constitution
Ave., NW, IR-6406, Washington, DC 20224.
Do not send the tax form to this address.
Instead, see Where To File on page 2.