1
MODULE 1 — TAX FUNDAMENTALS FOR TRUSTS AND ESTATES
Introduction
LEARNING OBJECTIVES
This chapter will offer participants a quick overview
of the fiduciary income tax return, Form 1041 (U.S.
Income Tax Return for Estates and Trusts).
Upon completion, you will:
Understand the nature of a fiduciary income tax
return
Know the unique terminology related to the fiduciary
income tax return
Know the following about filing returns:
When they are due
How to file
Where to file
NEW THIS YEAR
The gross income filing threshold in 2009 for bank-
ruptcy estates is $9,350 (up from $8,950 in 2008).
INTRODUCTION
In the government’s fiscal year ending September 30,
2007, more than 3.7 million fiduciary returns were filed
(up from just under 3.7 million, or 0.6%, in fiscal year
2006 (www.irs.gov/pub/irs-soi/07db02nr.xls) (there
are no more recent statistics available). These statistics
show that the number of fiduciary returns is expected
to increase annually.
One of the reasons for increased filings is the ever-growing
popularity of various types of trusts. One example of
this trend is the increased use of living trusts, which are
generally classified as “grantor” trusts for federal income
tax purposes. Once the purview of the rich, living trusts
are becoming widely utilized by middle-class taxpayers
throughout the country.
New types of trusts, such as domestic asset protection
trusts, qualified residence trusts and supplemental needs
trusts for Medicaid beneficiaries are being developed.
Also, despite the increasing estate tax exemption amount
that relieves a growing number of decedent’s estates from
transfer tax, such estates continue to have income tax
issues and filing requirements until the administration
1041_Prep_Book_10.indb 1
is completed and the estates are settled. All of this adds
up to a need for tax practitioners to be well versed in the
rules for fiduciary income taxation.
OVERVIEW OF ESTATES AND TRUSTS
A decedent’s estate includes an intestate estate (where a per-
son dies without leaving a valid will) as well as a testate estate
subject to administration. A decedent’s estate consists only
of assets subject to probate administration and, therefore,
does not include property that passes by right of survivor-
ship or by contract directly upon an owner’s death (such as
life insurance proceeds or retirement plan assets).
The regulations define a trust as an “arrangement created
either by a will or by an inter vivos declaration whereby
trustees take title to property for the purpose of protect-
ing or conserving it for the beneficiaries under the ordi-
nary rules applied in chancery or probate courts” (Reg.
§301.7701-4). There are a number of different types of
trusts, which are explained in Chapter 2.
NATURE OF FORM 1041
The rules for determining the taxation of income to
trusts, decedents’ estates, and their beneficiaries are
governed by Subchapter J of the Internal Revenue Code
(Code Secs. 641-692).
Sections 641-645 contain the general rules for the
income taxation of trusts and decedents’ estates.
Section 646 governs Alaska Native Settlement Trusts.
Sections 651-652 explain deductions for trusts
that distribute only current income (the rules for
“simple trusts”).
Sections 661-664 discuss accumulations of income and
distributions of corpus (the rules for “complex trusts”).
Sections 665-668 detail the treatment of excess dis-
tributions by trusts.
Sections 671-679 cover the grantor trust rules.
Sections 681-685 contain miscellaneous concepts
affecting trusts used for charitable purposes, in case
of divorce, and other situations.
Sections 691-692 explain income in respect of a
decedent, as well as the income taxes of certain spe-
cial taxpayers (e.g., astronauts and members of the
Armed Forces).
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 2 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
Form 1041 is an income tax return for trusts and estates.
The method of taxation for estates and trusts is hybrid in
nature, because it incorporates rules and concepts from
the various models of taxation (for individuals, partner-
ships and corporations) and ensures that income is taxed
only once—either at the entity or beneficiary level.
Income retained by the trust or estate is taxed to the entity.
In this respect, the return functions as a regular income
tax return, with the tax liability borne by the entity.
Income that is distributed to a beneficiary is taxed
to that beneficiary. In this respect, the return serves
as an information return, detailing the income that
is taxed to the beneficiary and supports the conduit
theory (similar to a partnership return).
Income items passed through to a beneficiary retain their
tax attributes. For example, tax-exempt income passes
through as such. The entity receives a deduction for the
income it distributes to a beneficiary.
NOTE: Entities other than simple trusts, complex
trusts, and estates (including bankruptcy estates)
that use the fiduciary return are not specifically dis-
cussed in this book. Thus, for example, fiduciaries
for pooled income funds may wish to seek additional
guidance on return preparation.
Nonresident alien estates and foreign trusts with U.S.
source income do not use Form 1041. Instead, they file
Form 1040-NR, U.S. Nonresident Alien Income Tax Re-
turn. Fiduciaries for foreign estates and trusts required
to report their income to the U.S. government should
consult the instructions to Form 1040-NR.
Some forms and schedules are unique to Form 1041. For
example, there is a special Schedule D for Form 1041.
Other forms and schedules are taken from Form 1040.
For example, Schedule C, Schedule E, and Schedule F
are the same schedules used for Form 1040.
ROLE OF THE FIDUCIARY
The fiduciary is the person responsible for filing a return
on behalf of the entity. This can be an individual or a
corporation (such as a bank’s trust department). For
trusts, the fiduciary is the trustee named in the trust in-
strument or subsequently appointed as trustee by a court.
For estates in which the decedent died and left a will, the
fiduciary is the executor or personal representative. For
estates in which the decedent died intestate, the fiduciary
is the administrator or personal representative appointed
by the court to represent the estate. For bankruptcy es-
tates, the fiduciary is the trustee in bankruptcy.
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Personal Liability
The fiduciary has personal liability for filing the fiduciary
income tax return. In the case of an estate, liability attaches
to the executor or administrator up to and after his or
her discharge if, prior to distribution and discharge, the
fiduciary had notice of tax obligations or failed to exercise
due diligence in ascertaining whether or not such obliga-
tions existed (Reg. §1.641(b)-2(a)). Regulations state that,
“Representative of a person or estate ... paying any part of
a debt of the person or estate before paying a claim of the
U.S. is [personally] liable to the extent of unpaid claims
of the Government” (31 USC §3713(b)).
For example, an executor who exhausts an estate’s assets
by paying state income taxes and debts to general credi-
tors, yet fails to pay the decedent’s final federal income
tax, is personally liable for the unpaid tax (Rev. Rul.
79-310, 1979-2 CB 404). Liability also follows assets
distributed to heirs. Similar rules for personal liability
apply to trustees of trusts.
Discharge from Personal Liability
An executor or any person acting in a similar capacity can
obtain a discharge from personal liability for a decedent’s
income taxes by making written application to the IRS
(Code Sec. 6905). An application can be made at any
time after the filing of the income tax return that reports
the taxes from which discharge is sought. An application
should be filed when the estate tax return (Form 706) has
been filed, or if no federal estate tax return is required,
when the decedent’s final income tax return has been
filed. If the executor does not receive notification from
the IRS, discharge is automatically effective nine months
after the IRS receives the application for discharge.
PRACTICE POINTER: Be sure to send the application
by certified or registered mail or by an authorized
private delivery service so that there is evidence of
the date of filing the application for discharge from
personal liability.
Notice of Fiduciary Relationship
A fiduciary may be required to notify the IRS of fiduciary
status. This is done by filing Form 56, Notice Concerning
Fiduciary Relationship. The notice is given when the fidu-
ciary relationship is created (e.g., when an executor receives
court appointment for a decedent’s estate). If there is more
than one fiduciary, each must file a separate Form 56.
PRACTICE POINTER: The same form is used to re-
voke or terminate the notice of fiduciary relationship
(fully or partially).
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STUDY QUESTIONS
1. The number of fiduciary returns being filed is
expected to increase annually. True or False?
2. Income distributed to the beneficiary of a trust is:
a. Taxed to the trust
b. Taxed to the beneficiary
c. Taxed half to the trust and half to the beneficiary
3. Which of the following schedules is unique to
Form 1041?
a. Schedule C
b. Schedule D
c. Schedule E
4. Which statement regarding a fiduciary is not
correct?
a. A fiduciary must be an individual.
b. A fiduciary has personal liability for filing
the fiduciary income tax return.
c. The fiduciary of a bankruptcy estate is
called a trustee.
NOTE: Answers to Study Questions, with feedback
to both the correct and incorrect responses, are pro-
vided in a special section beginning on page 101.
ROLE OF THE PREPARER
The preparer must report all required information on the
return and the attached schedules or statements. He or she
must figure the immediate tax liability for the entity and
the income, if any, to be distributed to the beneficiary.
PRACTICE POINTER: To properly prepare a fiduciary
return, the preparer should review the governing
instrument (i.e., trust document for a trust or will for
an estate).
This procedure ensures that the correct beneficiaries
are taken into account and that accounting income
reflecting allocations of income and principal con-
forms to the grantor/decedent’s wishes.
In preparing the return, the preparer needs to consider the
long-range effect of certain tax elections—for example, if
an estate adopts a tax year other than a calendar year.
Today, the preparer typically uses computer software
for the preparation of the return. However, the preparer
needs to be astute about what information he or she
enters into the return preparation program.
1041_Prep_Book_10.indb 3
MODULE 1 — CHAPTER 1 — Introduction 3
PRACTICE POINTER: The fiduciary signing the return
may also authorize the preparer to discuss the return
with the IRS for return processing purposes.
DEFINITIONS
In preparing a fiduciary return, there are a number of
terms and concepts that should be firmly understood.
Fiduciary
A fiduciary is a person who has a duty to act primarily for
the benefit of another person (e.g., a trust beneficiary). A
fiduciary can be an individual or a corporation (such as a
bank trust department).
The fiduciary of a trust is called a trustee. The fiduciary
of a decedent’s estate is called an executor, administra-
tor, or personal representative. A fiduciary can also be a
person in possession of a decedent’s estate. The fiduciary
of a bankruptcy estate is called a trustee.
Bankruptcy Estate
This is an entity that comes into effect when an indi-
vidual debtor files a petition under either Chapter 7 or 11
of Title 11 of the U.S. Code and is treated as a separate
taxable entity. (A separate taxable entity is not created
when a partnership or corporation files a petition under
any chapter of Title 11 of the U.S. Code.)
Beneficiary
The term beneficiary is used to describe an heir, lega-
tee, devisee, or beneficiary of a trust or estate (Reg.
§1.643(c)-1). An income beneficiary in a trust is entitled
to income and, in some cases, a portion of principal.
A remainderman is a beneficiary of a trust who receives
all property remaining in the trust when the term
of the income beneficiary has been completed. For
example, in a typical unified credit shelter trust of a
married couple with children, the surviving spouse is
given an income interest for life (income beneficiary),
with claims on the principal to pay for the surviving
spouse’s health, welfare, etc. The children who receive
the remaining trust property when he/she dies (i.e.,
what has not been used by the surviving spouse) are
the remaindermen.
Trusts
Generally, each trust is treated as a separate entity and
files a separate return (if otherwise required to file a
return). However, multiple trusts can be treated as
one trust for income tax purposes. This occurs where
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two or more trusts have substantially the same grantor
and beneficiary and a principal purpose of the trusts
is tax avoidance.
Irrevocable trusts created before March 1, 1984, are
grandfathered (i.e., even though they would otherwise
be multiple trusts treated as one trust, they are treated as
separate trusts). The only exception to this grandfathered
rule is for contributions to corpus after this date.
PRACTICE POINTER: Generally, custodianships,
guardianships and agencies do not create a trust ar-
rangement (Letter Ruling 8831055; Rev. Rul. 70-567,
1970-2 CB 133).
Income and Corpus
Income is defined as income determined by the governing
instrument and applicable local law (Reg. §1.643(b)-1 and
Reg. §1.651(a)-2)). “Income required to be distributed
currently” is income that is required to be distributed in
the year in which it is received. For trust purposes, income
has been revised to reflect the Uniform Principal and
Income Act (see Chapter 4) (T.D. 9102, 12/30/03)).
For a complex trust, an election can be made to treat
income distributed in the first 65 days of a tax year as
being made in the preceding tax year (Code Sec. 663(b)).
This election also applies to estates.
PRACTICE POINTER: To make the election, include
the amount of the distribution on the appropriate
line of Schedule B (“Other amounts paid, credited or
otherwise required to be distributed”) and check box
6 of the “Other Information” section of Form 1041.
PITFALL: The election is irrevocable but applies
only to that specific tax return, so a new election
must be made for subsequent years if desired (Reg.
§1.663(b)-1(a)(2)).
Corpus is the principal (property) of the entity from which
income flows. Other terms used to denote corpus include
res and principal—the terms are interchangeable.
Distributable Net Income (DNI)
Distributable net income (DNI) is the taxable income of
a trust or estate, computed with certain modifications
(Reg. §1.643(a)). For example, taxable income for this
purpose is figured without regard to the income distribu-
tion deduction and the personal exemption amount.
1041_Prep_Book_10.indb 4
DNI limits the income distribution deduction for
amounts paid, credited, or required to be distributed to
beneficiaries and is used to determine how much of an
amount paid, credited, or required to be distributed to
a beneficiary will be includible in the beneficiary’s gross
income instead of the trust’s or estate’s taxable income.
It is also used to apportion the character of the income
distributed to beneficiaries, as well as credits and deduc-
tions allocable to beneficiaries.
Income Distribution Deduction
This is generally the amount of income distributed to
a beneficiary. The trust or estate deducts this amount
from its income so that such income is only taxed once
(at the beneficiary level).
Accumulation Distribution
This is a term unique to complex trusts that allows the
trustee to accumulate income rather than distribute it
annually to the beneficiary. An accumulation distribu-
tion is a distribution of income that had previously been
accumulated by the trust. Since it has already been taxed
to the trust, it is not taxable again when the beneficiary
receives it.
OBSERVATION: In the past, complex throwback rules
were used to determine the beneficiary’s tax on an
accumulation distribution. These rules have been
repealed for distributions made in tax years beginning
after August 5, 1997. These rules had been used to
ensure that trusts would not accumulate income as a
means of reducing income taxes. However, in light of
the compressed tax brackets for trusts and estates,
this strategy is not an option so the throwback rules
are no longer needed.
STUDY QUESTION
5. With respect to the election to treat income distrib-
uted within the first 65 days of the following year
as made in the preceding year, which statement is
not correct?
a. The election applies only to complex trusts
and estates.
b. The election is irrevocable.
c. Once made, the election continues for sub-
sequent years unless revoked.
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Income in Respect of a Decedent (IRD)
This is income to which a decedent is entitled at
death but is not includible on decedent’s final Form
1040 (Code Sec. 691). It includes all accrued income
of a cash basis decedent, income accrued solely by
reason of the application of the accrual method of
accounting upon a decedent’s death, and income
upon which a decedent has a contingent claim at the
time of death.
Examples of IRD for a cash basis decedent include:
Deferred salary payments payable to decedent’s
estate
Uncollected interest on U.S. savings bonds
Proceeds from the completed sale of farm produce
Traditional IRAs and qualified retirement plan ben-
efits, including traditional 401(k)s
Pro rata share of any income item of an S corpo-
ration that would have been IRD if it had been
acquired directly from the decedent-shareholder.
The initial basis of the inherited stock is reduced
by the IRD (it can then be increased by any IRD
included in income).
OBSERVATION: The IRD has the same character it
would have had if the decedent had lived and had
received such amount.
STUDY QUESTION
6. All of the following items are considered income in
respect of a decedent except:
a. Interest on a savings account after the date
of death
b. Deferred salary payments payable to a
decedent’s estate
c. Funds in a traditional IRA
FILING REQUIREMENTS
AND OTHER FILING RULES
The 1041 filing requirements for estates and trusts are
similar but not identical.
Estates of Decedents
Domestic estates of decedents must file Form 1041 if
they have either:
Gross income of $600 or more, or
A nonresident alien beneficiary
1041_Prep_Book_10.indb 5
MODULE 1 — CHAPTER 1 — Introduction 5
Estates file Form 1040NR if their income comes from
sources outside the U.S. that are not effectively con-
nected with the conduct of a U.S. business, and that
income is not includible in gross income.
Bankruptcy Estates
Bankruptcy estates must file Form 1041 for 2009 if they
have gross income of $9,350 or more.
Simple or Complex Trusts
Simple or complex domestic trusts must file Form 1041
if they have any of the following:
Gross income of $600 or more,
Any taxable income (regardless of gross income), or
A nonresident alien beneficiary
A domestic trust is one over which a U.S. court is able to
exercise primary supervision regarding administration
(court test) and one or more U.S. persons have authority
to control all substantial decisions regarding the trust
(control test) (Reg. § 301.7701-7). A domestic trust also
includes a trust in existence on August 20, 1996 that was
treated as a domestic trust as of that date and elected to
continue to be treated as a domestic trust.
A foreign trust files Form 1040NR instead of Form 1041.
A foreign trust with a U.S. owner usually must file Form
3520-A, Annual Information Return of Foreign Trust with
a U.S. Owner.
A charitable remainder trust that has any unrelated
business taxable income does not file Form 1041. In-
stead, such a trust files Form 4720, Return of Certain
Excise Taxes under Chapters 41 and 42 of the Internal
Revenue Code.
Certain trusts are exempt from filing the fiduciary return
because trust income is reported directly on the benefi-
ciary’s income tax return. More specifically, a grantor
trust that is not a revocable grantor trust does not have
to complete Form 1041. Instead, the trust must attach
a statement to the fiduciary tax return of the grantor,
including the beneficiary’s name, address, taxpayer iden-
tification number (TIN), trust income, and deductions
and credits.
A revocable grantor trust created after 1980 does not have
to file Form 1041 if the grantor is also a trustee or co-
trustee and is treated as the owner of all trust assets by
virtue of the power of revocation (Reg. §1.671-4). Thus,
so-called living trusts set up by a grantor in which the
grantor is the beneficiary and trustee or co-trustee, are
exempt from filing the fiduciary return.
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A grantor type trust is a trust under applicable state law that
is not recognized as a separate taxable entity for income
tax purposes because the grantor has not relinquished
complete dominion and control over the trust.
For a trust that is treated as being owned by someone
other than the grantor and for a trust with a third-party
trustee, the regulations obviate the need to file a return
if one of two alternatives is used (Reg. §1.671-4):
Optional Method 1. For a trust that is treated as
owned by someone other than the grantor, the trustee
is required to furnish payors of income or proceeds
during the year either with the:
Name, TIN of the grantor or other person, and
address of the trust, or
Name and address of the trust
Optional Method 2. For a trust with a third-party
trustee, the trustee can provide the grantor with a
Form 1099 for each type of income or gross proceeds;
listing the trustee as the payor and the grantor as the
payee. Once this alternative method has been used, it
must continue to be used in future years. If the trust
is owned by more than one grantor, the alternative
reporting method must be used.
PRACTICE POINTER: A trustee who has been fil-
ing Form 1041 can change to one of the optional
methods for reporting. To make the changeover, file
a final Form 1041 for the immediately preceding tax
year for which the election is being made (check the
box on the top of Form 1041 to indicate that is a
final return). On the top of the form, write “Pursuant
to Section 1.671-4(g), this is the final Form 1041 for
the grantor trust.”
Where the grantor is a trustee or co-trustee who is treated
as the owner of the trust, the trust must give a statement
to the grantor showing all tax items of the trust that are
attributable to the grantor and provide all information
necessary for the reporting of these items.
Special Rule for Certain Revocable Trusts
When a grantor of a qualified revocable trust (QRT)
dies, a special election can be made to treat the trust as
part of the estate for income tax purposes. Making the
election obviates the need to file a Form 1041 for the
trust (Code Sec. 645). Instead, the estate reports trust
income on its Form 1041.
1041_Prep_Book_10.indb 6
PRACTICE POINTER: There are several practical
benefits to making this election.
First, only one income tax return is filed (covering
both the estate and the revocable trust treated as
part of the estate). This saves both return preparation
costs and perhaps additional fiduciary fees.
Second, the need to make estimated tax payments
by the trust may be avoided since an estate is not
required to make estimated tax payments for any
tax year ending within two years after the decedent’s
death—another cost saver.
Third, there are tax-planning advantages because of
the opportunity to elect fiscal year reporting.
A qualified revocable trust is any trust or portion of
a trust that is treated as being owned by the decedent
whose estate is making the election because of the power
to revoke the trust.
For this purpose, a power does not include any power
that is treated as held by the grantor because it is held
by the grantor’s spouse. A trust is treated as a revocable
trust as long as the grantor’s agent or legal representative
had the power to revoke the trust under local law during
the grantor’s incapacity (Reg. §1.645-1(b)).
The advantages of making the Code Sec. 645 election
include the following:
The trust can claim a charitable deduction for
amounts permanently set aside for charity without the
requirement that such amounts actually be paid.
The trust can use a fiscal year.
The active participant requirement under the passive
loss rules is waived for two years after the death of the
grantor/decedent (Code Sec. 469(i)(4)).
The trust can hold S corporation stock without dis-
qualifying the S election (the estate is treated as the
shareholder) (Code Sec. 1361(b)(1)(B) and (c)(2)).
No estimated taxes need be paid for two years follow-
ing the decedent’s death.
Of course, except as otherwise noted here, making the
election does not change the taxation of income from the
trust (i.e., the election does not convert taxable income
into tax-free income).
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 MODULE 1 — CHAPTER 1 — Introduction 7

Form 7004
(Rev. December 2008)
Application for Automatic Extension of Time To File Certain
Business Income Tax, Information, and Other Returns OMB No. 1545-0233
 File a separate application for each return.
Department of the Treasury
Internal Revenue Service  See separate instructions.

Name Identifying number

Type or
Print
Number, street, and room or suite no. (If P.O. box, see instructions.)
File by the due
date for the
return for which
an extension is City, town, state, and ZIP code (If a foreign address, enter city, province or state, and country (follow the country’s practice for entering
requested. See postal code)).
instructions.

Note. See instructions before completing this form.

Part I Automatic 5-Month Extension Complete if Filing Form 1065, 1041, or 8804
1a Enter the form code for the return that this application is for (see below)
Application Form Application Form
Is For: Code Is For: Code
Form 1065 09 Form 1041 (estate) 04
Form 8804 31 Form 1041 (trust) 05
Part II Automatic 6-Month Extension Complete if Filing Other Forms
b Enter the form code for the return that this application is for (see below)
Application Form Application Form
Is For: Code Is For: Code
Form 706-GS(D) 01 Form 1120-PC 21
Form 706-GS(T) 02 Form 1120-POL 22
Form 1041-N 06 Form 1120-REIT 23
Form 1041-QFT 07 Form 1120-RIC 24
Form 1042 08 Form 1120S 25
Form 1065-B 10 Form 1120-SF 26
Form 1066 11 Form 3520-A 27
Form 1120 12 Form 8612 28
Form 1120-C 34 Form 8613 29
Form 1120-F 15 Form 8725 30
Form 1120-FSC 16 Form 8831 32
Form 1120-H 17 Form 8876 33
Form 1120-L 18 Form 8924 35
Form 1120-ND 19 Form 8928 36
Form 1120-ND (section 4951 taxes) 20
2 If the organization is a foreign corporation that does not have an office or place of business in the United States,
check here 

3 If the organization is a corporation and is the common parent of a group that intends to file a consolidated return,
check here 
If checked, attach a schedule, listing the name, address, and Employer Identification Number (EIN) for each member
covered by this application.
Part III All Filers Must Complete This Part
4 If the organization is a corporation or partnership that qualifies under Regulations section 1.6081-5, check here 
5a The application is for calendar year 20 , or tax year beginning , 20 , and ending , 20

b Short tax year. If this tax year is less than 12 months, check the reason:
Initial return Final return Change in accounting period Consolidated return to be filed

6 Tentative total tax 6

7 Total payments and credits (see instructions) 7

8 Balance due. Subtract line 7 from line 6. Generally, you must deposit this amount using the
Electronic Federal Tax Payment System (EFTPS), a Federal Tax Deposit (FTD) Coupon, or
Electronic Funds Withdrawal (EFW) (see instructions for exceptions) 8
For Privacy Act and Paperwork Reduction Act Notice, see separate Instructions. Cat. No. 13804A Form 7004 (Rev. 12-2008)

1041_Prep_Book_10.indb 7 10/19/2009 10:13:40 AM

 8 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
Making the election. The executor and the trustee
must make the election. If there is no executor ap-
pointed for the estate, then the trustee alone makes
the election. The election is made by attaching Form
8855, Election to Treat a Qualified Revocable Trust as
Part of an Estate, to a timely-filed Form 1041 (includ-
ing extensions). If the combined estate and electing
trust do not have sufficient income to be required to
file Form 1041, Form 8855 must still be filed no later
than the due date for the Form 1041. Form 8855 is
reproduced in Chapter 11.
Once made, the election is irrevocable. The election
then applies to all tax years of the estate ending after
the date of the decedent’s death and before the ap-
plicable date.
The applicable date is either:
Six months after a final determination of federal es-
tate tax liability if the estate is required to file Form
706, or
Two years after the date of death if the estate is not
required to file Form 706
Who Must File the Return
The obligation to file the return and pay the tax is placed
on the fiduciary, who is both the:
Trustee for trusts and bankruptcy estates, and
Executor, administrator, or personal representative
for decedents’ estates
PITFALL: The fiduciary is personally liable for this
obligation if any debt or bequest is paid before sat-
isfying the federal tax obligation. This liability does
not end when the fiduciary’s role is terminated.
Due Dates for Filing the Return
The due date for filing the 2009 Form 1041 is April
15, 2010, for trusts required to use a calendar year. In
the case of estates (and qualified revocable trusts that
elect to be treated as part of the grantor’s estate for
income tax purposes), if a fiscal year is selected, the
due date is the 15th day of the fourth month after the
close of the estate’s tax year.
EXAMPLE: An estate adopts a fiscal year ending on
May 31. The estate’s income tax return is due no
later than September 15.
1041_Prep_Book_10.indb 8
Trusts and estates can obtain filing extensions. Ef-
fective for returns due on or after January 1, 2009,
the extension is five months (IR-2008-84, 6/30/08);
previously, trusts and estates could obtain a six-
month extension. However, this period for trusts
(other than certain special trusts) and estates was
shortened to five months in order to give beneficia-
ries an opportunity to receive their Schedule K-1
and file their personal returns within their six-month
extension period.
PRACTICE POINTER: An extension granted to an
estate or trust does not extend the time for filing by the
beneficiaries. Therefore, it is advisable for beneficiaries
to obtain their own personal filing extensions.
Trusts and estates seeking a filing extension must use
Form 7004, Application for Automatic Extension of
Time to File Certain Business Income Tax, Information,
and Other Returns (reproduced on page 7). An estate
requesting an automatic extension must enter Code 04
in the appropriate box and a trust uses Code 05—these
are in Part 1 of Form 7004.
Certain special trusts still have a six-month filing
extension. The Electing Alaska Native Settlement
Trust uses Code 06 and a Qualified Funeral Trust
uses Code 07 in Part II of Form 7004. No additional
extension of time to file can be obtained (T.D. 9229,
11/7/2005).
PITFALL: An extension of time to file does not extend
the time to pay the tax.
STUDY QUESTIONS
7. All of the following entities must file Form 1041
except:
a. Estates of decedents with gross income of
$600 or more or with a nonresident alien
beneficiary
b. Bankruptcy estates with gross income of
$9,350 or more in 2009
c. Revocable trusts created after 1980 where the
grantor is treated as the owner of all trust assets
and acts as trustee (so-called living trusts)
10/19/2009 10:13:41 AM
 MODULE 1 — CHAPTER 1 — Introduction 9

THEN use this address if you:

8. If a qualified revocable trust elects to be treated
as part of a grantor/decedent’s estate, all of the Are not enclos- Are enclosing
following result except: IF you are ing a check or a check or
located in ... money order ... money order ...
a. The active participation rules under Code
Sec. 469 are waived for two years after the Connecticut, Internal Revenue Internal Revenue
Delaware, District of Service Center, Service Center,
death of the grantor/decedent.
Columbia, Georgia, Cincinnati, Ohio Cincinnati, Ohio
b. The trust must continue to make estimated Illinois, Indiana, 45999-0048 45999-0148
tax payments despite the election. Kentucky, Maine,
c. The trust can claim a charitable contribu- Maryland, Massa-
tion deduction for amounts permanently chusetts, Michigan,
set aside for charity without the require- New Hampshire,
ment that such amounts actually be paid. New Jersey, New
York, North Caro-
9. An estate adopts a fiscal year ending on May 31. lina, Ohio, Pennsyl-
vania, Rhode Island,
The estate’s income tax return for 2009 is due no
South Carolina,
later than:
Tennessee, Ver-
a. March 15, 2010 mont, Virginia, West
b. April 15, 2010 Virginia, Wisconsin
c. September 15, 2010 Alabama, Alaska, Internal Revenue Internal Revenue
Arizona, Arkansas, Service Center, Service Center,
California, Colorado, Ogden, Utah Ogden, Utah
Where to File Florida, Hawaii, 84201-0048 84201-0148
Idaho, Iowa, Kan-
Generally, all trusts and estates required to file do so sas, Louisiana, Min-
in the IRS Service Center in which they are located. nesota, Mississippi,
The location of the entity generally is based on the Missouri, Montana,
Nebraska, Nevada,
location of the fiduciary, which may differ from the New Mexico, North
location of the beneficiaries or the location of the Dakota, Oklahoma,
decedent. There are two service centers that process Oregon, South
Form 1041 returns. Dakota, Texas,
Utah, Washington,
Wyoming
A list of these IRS Service Centers is on the follow-
ing page. A foreign country Internal Revenue Internal Revenue
or a United States Service Center, Service Center,
possession Ogden, Utah, Ogden, Utah,
NOTE: Different addresses are used for returns ac- 84201-0210 84201-0222
companied by payment than those without payment,
as well as foreign entity returns.

1041_Prep_Book_10.indb 9 10/19/2009 10:13:41 AM

 10 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
Private Delivery Services
Returns can be filed using designated private delivery
services in order to meet the “timely mailing as timely
filing/paying” rule for tax returns and payments. The
following services have been designated (Notice 2004-
83, IRB 2004-52):
DHL Worldwide Express (DHL): DHL Same Day
Service; DHL Next Day 10:30 am; DHL Next Day
12:00 pm; DHL Next Day 3:00 pm; and DHL 2nd
Day Service.
Federal Express (FedEx): FedEx Priority Overnight,
FedEx Standard Overnight, FedEx 2Day, FedEx Inter-
national Priority, and FedEx International First.
United Parcel Service (UPS): UPS Next Day Air,
UPS Next Day Air Saver, UPS 2nd Day Air, UPS 2nd
Day Air A.M., UPS Worldwide Express Plus, and UPS
Worldwide Express.
Electronic Filing
Estate and trust returns can be filed electronically. The
IRS’s 1041 e-file program enables fiduciary returns to
be filed through e-file providers. For a list of providers,
go to www.irs.gov/efile/index.html
PRACTICE POINTER: Fiduciaries who submit multi-
ple returns may wish to become an e-file provider.
1041_Prep_Book_10.indb 10
STUDY QUESTIONS
10. Trusts and estates can obtain an automatic filing
extension? True or False?
11. All of the following statements are correct except:
a. An IRS-designated private delivery service
can be used to satisfy the “timely mailed as
timely filed/paid” rule.
b. Form 1041 returns can be e-filed.
c. A decedent’s Form 1041 must be filed in
the same service center in which the dece-
dent was domiciled.
RECENT DEVELOPMENTS
The IRS has issued a notice of a proposed revenue ruling
explaining the tax results when a family members create
a private trust company (PTC) to serve as the trustee of
trusts having family members as grantors and beneficia-
ries (Notice 2008-63, IRB 2008-31, 261). Under the
proposed ruling, neither the appointment nor service of
a PTC as trustee will, by itself, cause a trust to be treated
as a grantor trust.
The IRS has shortened the extended due date for returns
of trusts (other than certain special trusts) and estates
due on or after January 1, 2009, to five months (IR-
2008-84, 6/30/08).
The IRS designated certain actions that manipulate
grantor trusts as transactions of interest which have the
potential for tax evasion and will be closely watched
(Notice 2007-73, IRB 2007-36, 545).
10/19/2009 10:13:42 AM

MODULE 1 — TAX FUNDAMENTALS FOR TRUSTS AND ESTATES
Overview of Trusts and Estates
LEARNING OBJECTIVES
This chapter will enable participants to gain a quick
overview of the taxation of trusts and estates.
Upon completion, you will know:
How trusts and estates are created
How to identify different types of trusts
The different types of estates
INTRODUCTION
Before focusing on the details of completing the fidu-
ciary return, it is advisable to review some basic rules
for trusts and estates. Note that, even though the federal
estate tax is currently being temporarily phased out for
2010 (unless Congress passes further legislation), the
use of trusts in estate and financial planning should not
diminish appreciably. Also, estates will still have to file
income tax returns for the period of administration even
though there may be no estate tax owed.
TRUSTS
An individual can create a trust during life (inter vivos
trusts) or by will (testamentary trusts). Examples of spe-
cific types of trusts include marital deduction trusts, qual-
ified terminable interest property (QTIP) trusts, credit
shelter trusts and irrevocable life insurance trusts.
PRACTICE POINTER: A copy of the trust instrument
need not be filed with Form 1041 unless the IRS
requests it.
There are two basic types of trusts: simple trusts and
complex trusts. Whether a trust is classified as a simple
or complex trust affects the amount of the exemption
that the trust can claim and who reports the income.
Simple Trusts
A trust is treated as a simple trust if the trust instrument
requires the current distribution of all income and pro-
hibits the distribution or use of trust funds for charitable
purposes, and if the trust does not distribute amounts
attributable to corpus (Code Sec. 651; Reg. §1.651(a)-1).
1041_Prep_Book_10.indb 11
2
Examples of a simple trust include the following:
A Subchapter S Trust (QSST) is a simple trust in
all years other than the year of termination (when
corpus is distributed) because, by definition, the
trust requires the current distribution of all income.
A separate share trust may not be treated as a QSST
if there is a remote possibility that the corpus of the
trust will be distributed during the lifetime of the cur-
rent income beneficiary to someone other than that
beneficiary (Rev. Rul. 93-31, 1993-1 CB 186).
A Terminable interest property trust (QTIP trust)
is a simple trust in all years other than the year of
termination (when corpus is distributed) because, by
definition, the trust requires the current distribution
of all income to the surviving spouse.
OBSERVATION: A trust requiring the distribution
of all of its income annually to a beneficiary (other
than a charity) is a simple trust even if it makes no
distributions.
Complex Trusts
Complex trusts include all trusts that do not fit the defi-
nition of simple trusts. Examples of complex trusts in-
clude charitable remainder trusts and discretionary trusts
that do not mandate current distribution of income.
A simple trust will become a complex trust in any year
it distributes principal. A simple trust automatically
becomes a complex trust in the year of termination since
principal is distributed in that year.
The governing instrument and/or state law can deter-
mine the type of trust. For example:
A testamentary trust provided that the trust would
distribute all of its income to the son, as income
beneficiary, but undistributed income at the time of
the son’s death would be distributed under the father’s
residuary clause. The trust was a simple trust in all
years during the son’s life but would be a complex
trust in the year of the son’s death (S.A. Seligson,
10/19/2009 10:13:42 AM
 12 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
63 TCM 3101, TC Memo 1992-320, aff ’d CA-9,
unpublished opinion, 1/6/94).
Gain or loss on the sale of S corporation stock by a
qualified Subchapter S trust is taxable to the benefi-
ciary (not the trust), even if state law allocates the
proceeds to principal and thus, the QSST is a simple
trust (Rev. Rul. 92-84, 1992-2 CB 216).
Grantor Trusts
A grantor trust is a trust that is treated as being substan-
tially owned by the grantor. Different incidents of own-
ership can cause a trust to be treated as a grantor trust
(Code Sec. 673-678). For example, a grantor trust is one
in which a grantor is treated as the owner of any portion of
the trust in which he or she has a reversionary interest in
either the income or corpus if, at the creation of the trust,
the value of that interest is more than five (5) percent of
the value of that portion. This definition only applies to
transfers made in trust after March 1, 1986.
A grantor is treated as holding any power or interest
that was held by either the grantor’s spouse at the time
the power or interest was created, or by a person who
became the grantor’s spouse after that power or interest
was created (Code Sec. 672(e)).
The best example of a grantor trust is a revocable living
trust. The advantages of this type of trust are discussed
in Chapter 11. When a grantor of a revocable trust dies,
his or her estate can elect to treat the trust as part of the
estate (Code Sec. 645). This election was discussed in
Chapter 1.
STUDY QUESTIONS
1. Once a trust is a simple trust, it can never be a
complex trust. True or False?
NOTE: Answers to Study Questions, with feedback
to both the correct and incorrect responses, are pro-
vided in a special section beginning on page 101.
Qualified Disability Trusts
Disabled individuals can qualify for Medicaid while still
enjoying some “extras” through the use of special trusts,
called qualified disability trusts, which are set up for their
benefit. Since the trustee is not required to distribute all
of the income annually, it is a complex trust. These trusts
are sometimes referred to as supplemental needs or special
needs trusts.
1041_Prep_Book_10.indb 12
A qualified disability trust is any trust established solely
for the benefit of an individual under the age of 65
who is disabled and all of the beneficiaries of which
are determined by the Social Security Administration
to have been disabled for some part of the year (Code
Sec. 1396p(c)(2)(B)(iv) of the Social Security Act). The
trust must be set up by a parent, grandparent, legal
guardian or court for the benefit of disabled person;
the disabled person cannot set up such trust on his or
her own behalf.
PRACTICE POINTER: A trust will not be disqualified
merely because the trust’s corpus may revert to a
person who is not disabled after the trust ceases to
have any disabled beneficiaries.
Family Estate Trusts
This type of trust goes by several different names. It is re-
ferred to as a family, family estate, pure, equity, equity pure,
prime, or constitutional trust. With this type of entity, an
individual transfers property to a trust or assigns income to
a trust in exchange for the services of that individual. The
trust instrument typically includes provisions to pay the liv-
ing expenses of the individual and/or his or her family. The
individual may be the trustee of the trust or an executive
officer of the entity. Ownership interests in the trust are evi-
denced by certificates of beneficial interest. When the trust
terminates, corpus and undistributed income is distributed
to the owner of the certificates (i.e., the individual who set
up the trust and members of his or her family). A family
estate trust is generally treated as a grantor trust.
PRACTICE POINTER: Family estate trusts are no
longer popular, having largely been replaced by
family limited partnerships and family limited liability
companies (LLCs).
Charitable Remainder Trusts
A charitable remainder trust is designed to provide the
trust donor or chosen beneficiaries with income for life
or for a term of years (not exceeding 20 years), after
which the remaining trust property passes to an exempt
organization. These trusts can be set up during a person’s
lifetime, or under a person’s will or revocable living trust
to be created upon the donor’s death.
There are two key advantages to a charitable remain-
der trust:
1. Appreciated property can be transferred to the trust,
which can sell it income tax free (because the trust
10/19/2009 10:13:42 AM

is a tax-exempt entity) and reinvest the proceeds of
sale to produce income for the grantor-beneficiary.
Consider, for example, a grantor who owns a highly-
appreciated vacation property, which he no longer uses.
Instead of selling the property and paying capital gains
on the profit, the grantor can transfer it to a charitable
remainder trust. The trustee can then sell the property
without any current income tax and use the proceeds
to buy income-producing assets that will furnish the
grantor with an income stream.
2. The grantor (if the trust is set up during his or her
lifetime) can claim a current charitable contribution
income tax deduction for the value of the remainder
interest that will pass to charity. In the case of a testa-
mentary charitable remainder trust, the estate can claim
an estate tax charitable contribution deduction.
There are two types of charitable remainder trusts:
1. The charitable remainder unitrust
2. The charitable remainder annuity trust
Many of the rules are applicable to both types of trusts,
but there are some differences.
Charitable remainder unitrust. This type of trust re-
quires payments to the non-charitable beneficiary of a
fixed percentage (not less than 5 percent) of the trust
property’s fair market value determined each year.
PRACTICE POINTER: If the value of assets in the trust
appreciates, income beneficiaries receive increased
distributions.
Charitable remainder annuity trust. This type of trust
requires the payment to the non-charitable beneficiary
of a fixed amount annually, based on a percentage of not
less than five percent of the value of the property con-
tributed to the trust. Since payments are fixed, principal
may have to be used if income is insufficient to meet
required distributions.
Special income tax rules apply to charitable remainder
trusts (Code Sec. 664). In general, charitable remainder
trusts are exempt from taxation. Taxation of the trust arises
only if there is unrelated business income. In that case, the
trust can claim a deduction for distributions of income
to beneficiaries. Income beneficiaries are not exempt
from taxation of income they receive from a charitable
remainder trust. The character of the income distributed
to the beneficiaries is determined by using the ordering
rules contained in Reg. §1.664-1(d). These regulations
are complex, but in general the income beneficiaries are
treated as receiving income in the following order:
1041_Prep_Book_10.indb 13
M O D U L E 1 — C H A P T E R 2 — O v e r v i e w o f Tr u s t s a n d E s t a t e s 13
Ordinary income to the extent of the trust’s ordinary
income for the year and any undistributed ordinary
income from prior years
Short-term capital gains to the extent of the sum of the
trust’s net short-term capital gains for the year and un-
distributed short-term capital gains from prior years
Long-term capital gains to the extent of the sum of the
trust’s net long-term capital gains for the year and un-
distributed long-term capital gains from prior years
Other income, including tax-exempt income, to the
extent of the sum of the trust’s other income for the year
and undistributed other income from prior years
Distribution of corpus
PRACTICE POINTER: The IRS had required a married
person setting up a charitable remainder trust (CRT) on
or after June 28, 2005, to obtain a written waiver from
a spouse stating that the spouse will not exercise a
state’s right of election upon the grantor’s death as a
condition of qualification for a CRT (Rev. Proc. 2005-24,
2005-1 CB 909).
However, in response to complaints by practitioners
about the burden of compliance, the IRS has extended
the safe harbor deadline indefinitely while it reconsiders
the issue (Notice 2006-15, IRB 2006-8, 501). To date, no
additional guidance has been provided.
Charitable remainder trusts are taxed on unrelated
business taxable income (UBTI) (Code Sec. 512). If a
charitable remainder trust has UBTI, it remains exempt
from federal income tax but is subject to a 100 percent
excise tax on its UBTI.
The tax is reported on Form 4720, Return of Certain
Excise Taxes under Chapters 41 and 42 of the Internal
Revenue Code. The tax is treated as paid from corpus,
and the trust income that is UBTI income of the trust
for purposes of determining the character of the distri-
bution made to the beneficiary is allocated to corpus.
(Proposed amendment to Reg. §1.664-1(D)(2), NPRM-
REG-127391-07, 3/7/08).
PRACTICE POINTER: The IRS has identified a transac-
tion involving charitable remainder trusts as a transac-
tion of interest for purposes of the reportable transac-
tion rules (Notice 2008-99, IRB 2008-47, 1194).
Charitable Lead Trusts
In a charitable lead trust, a charity has an income interest
for a term of years, with the reversion to the grantor (or the
remainder to someone else designated by the grantor).
10/19/2009 10:13:42 AM
 14 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
Grantor Retained Income Trusts (GRITs)
These are irrevocable inter vivos trusts in which the
grantor keeps an income interest for a term of years, with
property then passing to a named beneficiary at the end of
that term. The purpose of a GRIT is to transfer property
at reduced transfer tax costs.
With a GRIT, a trust is set up for a fixed term (e.g., 10
or 15 years), typically funded with appreciating assets.
Only the value of the remainder after the end of the trust
term is a gift for gift tax purposes if the remainder passes
to someone other than the grantor or spouse.
Today, GRITs must take one of three forms:
Grantor retained annuity trust (GRAT) for members
of the family of the grantor
Grantor retained unitrust (GRUT) for members of
the family of the grantor
Grantor retained income trust (GRIT) for a person
who is not a family member of the grantor
A variation on the GRIT is a qualified personal residence
trust (QPRT). A donor can establish a QPRT to own his
or her personal residence (or qualified vacation home) and
the trust cannot hold any asset other than a modest cash
holding and the residence.
Like a GRIT, QPRTs are designed to pass the home to
children or others at reduced transfer tax cost. There are
severe restrictions on what the trust can own and other
terms that the trust must contain.
PRACTICE POINTER: As a practical matter, a QPRT
does not generally produce income and qualifies as a
grantor trust and so would not have to file a separate
income tax return.
STUDY QUESTIONS
2. All of the following are requirements of a qualified
disability trust except:
a. The trust must provide that corpus be pay-
able to the disabled individual’s estate upon
the death of the disabled person.
b. The trust must be set up by a parent, grand-
parent, legal guardian, or court for the benefit
of the disabled person.
c. The disabled person must be under the age
of 65.
1041_Prep_Book_10.indb 14
3. Which statement regarding a charitable remainder
trust is correct?
a. The trust is tax-exempt (unless there is unre-
lated business income).
b. The income beneficiary is tax-exempt.
c. Both a. and b. are correct.
Qualified Subchapter S Trusts (QSSTs)
These are trusts set up to hold stock in an S corporation.
They must meet certain statutory requirements (Code
Sec. 1361(d)):
There is only one income beneficiary at a time.
Any corpus distributed during the life of the cur-
rent income beneficiary must be distributed to
that beneficiary.
As mentioned earlier, a QSST is a simple trust in all
years except the year of any distribution of corpus (such
as upon the termination of the trust).
Electing Small Business Trusts (ESBTs)
These are also trusts set up to hold stock in an S corpora-
tion (Code Sec. 1361(e)). However, they provide more
flexibility than QSSTs. For example, they can have more
than one current income beneficiary at a time and the
trustee can have discretion on the distribution or ac-
cumulation of income.
ESBTs are subject to special rules (Code Sec. 641(c)).
The portion of an ESBT consisting of stock in one or
more S corporations is treated as a separate trust. This
separate trust is taxed as follows:
The separate trust is not entitled to claim any exemption.
Income from the separate trust is taxed at the highest
marginal rate imposed on trusts and estates (i.e., a flat
rate in 2009 of 35 percent on ordinary income and
15 percent on net capital gains).
The only items of income, loss, deduction, or credit
that can be taken into account are the pro rata share
of S corporation items, gain or loss from the dis-
position of S stock, state or local income taxes and
administrative expenses allocated to S corporation
items. Also, interest paid or accrued on indebtedness
to acquire stock in an S corporation can be taken into
account in computing the taxable income of the S
portion of an ESBT (Code Sec. 641(c)(2)(iv)). No
deduction can be claimed for capital losses in excess
of capital gains. No exemption or income distribu-
tion deduction can be claimed.
10/19/2009 10:13:42 AM

No item relating to S corporation stock is allocated to the
beneficiary. All such income and other items are taxed
to the trust. The income is not included in the distribut-
able net income of the trust and is not included in the
beneficiary’s income. Instead, tax on this separate portion
is entered as an additional tax on Schedule G of Form
1041 (explained in more detail in Chapter 7).
PITFALL: It would appear that the alternative minimum
tax exemption for the ESBT separate trust is zero.
The balance of the trust (the portion not treated as a
separate trust holding S stock) is taxed without taking
into account items already considered by that separate
trust. The trust can figure distributable net income for
the non-separate trust.
If the trust terminates before the end of the S corporation
tax year, the trust must take into account it’s pro rata
share of S corporation items for its final year.
PRACTICE POINTER: On the termination of any or
all of the separate trust, any unused loss carryovers
and excess deductions are taken into account by
the entire trust.
Regulations clarify who is the beneficiary of the ESBT
(Reg. §1.1361-1(m)). A “beneficiary” includes any per-
son with a present, remainder, or reversionary interest
in the trust other than a remote, contingent interest.
If the trust makes a distribution to another trust, the
beneficiary of the distributing trust is the beneficiary
of the distributor trust (not the trust itself ). Generally,
where there is a less than 5 percent probability that a
person will receive an interest in the trust, it is viewed
as a remote, contingent interest and the person is not
viewed as a beneficiary. Also, effective after December
31, 2004, powers of appointment that are not exercised
are disregarded in determining the potential current
income beneficiaries of the ESBT.
STUDY QUESTIONS
4. Which of the following types of trust is not a
simple trust?
a. Qualified Subchapter S trust (QSST) (other
than in the year of termination)
b. Charitable remainder trust (CRT)
c. Qualified terminable interest property trust
(QTIP) (other than in the year of termination)
1041_Prep_Book_10.indb 15
M O D U L E 1 — C H A P T E R 2 — O v e r v i e w o f Tr u s t s a n d E s t a t e s 15
5. Which of the following types of trusts is a simple trust?
a. Qualified disability trust
b. Electing small business trust (ESBT)
c. A trust that requires the current distribution of
all income, prohibits the distribution or use of
trust funds for charitable purposes, and does
not distribute amounts attributable to corpus
6. A qualified subchapter S trust (QSST) is:
a. Always a simple trust
b. Always a complex trust
c. Sometimes a simple trust and sometimes
a complex trust (depending on principal
distributions)
7. Which statement regarding an electing small busi-
ness trust (ESBT) is not correct?
a. The income from the separate trust is taxed
at a flat rate, which is the highest marginal
rate on trusts and estates.
b. No item relating to S corporation stock is al-
located to the beneficiary.
c. The separate trust may use the exemption
allowed to complex trusts.
Multiple Trusts (Code Sec. 643(f))
Multiple trust rules are effective for irrevocable trusts
set up after March 1, 1984. These rules also apply to
additions to corpus to pre-March 2, 1984, trusts. In
general, these rules require multiple trusts to be ag-
gregated and treated as one trust where multiple trusts
were created for tax avoidance purposes. Only one
Form 1041 is required to be filed for trusts treated as
multiple trusts.
PRACTICE POINTER: When faced with multiple
trusts that are aggregated, it is usually advisable
from a tax perspective to distribute income, so that
it is not taxed at the trust’s high rate.
Definition of multiple trusts. Multiple trusts are two
or more trusts with substantially the same grantor
and substantially the same primary beneficiary, if
a principal purpose of having multiple trusts is tax
avoidance. A married couple is treated as one person
for purposes of this definition.
EXAMPLE: A parent sets up Trust A and Trust B
for a child in order to keep taxes down. Income,
expenses, etc. of Trust A and Trust B are aggregated
for reporting purposes.
10/19/2009 10:13:42 AM
 16 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
However, where there is a valid purpose for multiple
trusts, they will not be aggregated merely because there
is the same beneficiary.
EXAMPLE: A parent sets up Trust A and Trust B as
follows:
Trust A provides that all income is payable to Child A
for life, with the remainder payable to Child B upon
the death of Child A.
Trust B gives discretion to the trustee to pay income and
principal to Child A for medical expenses and also gives
discretion to the trustee to pay income to Child B for
education, support and maintenance, with the remain-
der payable to Child B upon the death of Child A.
Since the purpose of these multiple trusts is not tax
avoidance, they should not be aggregated.
Accumulation distributions and multiple trusts. If a
beneficiary receives a distribution from three or more
trusts related to the same tax year, then special rules
apply (Code Sec. 667(c)). In determining a partial tax,
the trust may not use as an offset or credit any taxes paid
by third or additional trusts. This rule does not apply if
the accumulation distribution is less than $1,000.
Alaska Native Settlement Trusts
These are trusts set up to receive awards to these Native
Americans in settlement of Alaska aboriginal settlement
claims under the Alaska Native Settlement Claims Act
of 1971 (“ACT”). The ACT established more than 200
Native corporations to receive almost $1 billion and 44
million acres of land. Subsequent legislation authorized
settlement trusts, which are allowed only to invest the funds
passively to promote the health, education and welfare of
the beneficiaries and preserve the heritage and culture of
the Native Americans. These trusts can elect under Code
Sec. 646 to be taxed on their income at the lowest federal
tax rates for unmarried individual taxpayers (i.e., 10 percent
for ordinary income; zero percent for capital gains).
Foreign Trusts
If a trust is a nonresident alien trust or a foreign trust
with U.S. source income, then the trustee must file Form
1040-NR. The estate of a nonresident alien is taxed on
U.S. source income. If an estate or domestic trust was the
grantor of or made transfers to a foreign trust, this fact must
be noted on line 4, page 2 of Form 1041 in the “Other
Information” section. If so, then Form 3520, Annual Re-
turn to Report Transactions with Foreign Trusts and Receipt
of Certain Foreign Gifts, may have to be completed.
Special rules apply to accumulation distributions from
foreign trusts (Code Secs. 667(d) and 668). If a foreign
1041_Prep_Book_10.indb 16
trust accumulates income, changes its status to a do-
mestic trust and then distributes accumulated income,
the distribution is treated as being made from a foreign
trust (Rev. Rul. 91-6, 1991-1 CB 89).
Regulations clarify the rules for determining whether a
trust is a domestic or foreign trust (Reg. §301.7701-7).
The regulations add investment trusts to the category
of trusts that can use the control test to determine the
situs of the trust. (Situs is the jurisdiction governing
the trust.) These trusts are subject to reporting require-
ments that ensure that all trustees are U.S. persons and
the interests offered for sale are primarily in the United
States to U.S. persons.
Abusive Trusts
Trusts that are abusive, which include those that lack
economic substance or otherwise attempt to skirt tax
rules, will be disregarded for tax purposes even though
they may be legally valid under local law.
For example, in one case, a taxpayer set up a family
trust and transferred all of his property to the trust,
including the right to receive salary from a closely-held
business. The main trust was an asset management trust
used to pay all of the taxpayer’s personal expenses,
including management fees to the taxpayer, and to
distribute excess corpus to a charitable trust also set
up by the taxpayer.
After claiming all expenses as deductions, the trust
reported no taxable income. An appellate court held
that the trust was a sham transaction lacking any
economic effect other than to generate tax losses (F.
Muhich, CA-7, 2001-1 USTC ¶50,199, 238 F3d 860).
The taxpayer’s personal expenses were not deductible
trust administration expenses. As such, the taxpayer
was subject to the disallowance of deductions and
accuracy-related penalties.
In some instances, charitable lead and remainder trusts
can be viewed as abusive trusts. As part of the IRS
crusade against these abusive trusts, regulations seek to
limit the opportunity for abusive trusts in the case of
charitable lead and remainder trusts (T.D. 8923 and
T.D. 8926). These regulations eliminate the possibility
of so-called vulture trusts by limiting who can be the
measuring life for determining the term of the trust
(precluding the use of seriously ill individuals, who are
unrelated to the grantor or the remainder beneficiaries
as measuring lives for charitable lead trusts). The regula-
tions also prevent the mischaracterization of distribu-
tions from the trust.
10/19/2009 10:13:42 AM

The IRS has also ruled that trusts cannot be used to
avoid the restrictions on private foundations (Letter
Ruling 200047048). Thus, where one instrument has
created four trust funds, each with its own employer
identification number and bank account, the trusts
must be viewed together for purposes of determining
the charitable contribution limit.
PRACTICE POINTER: The IRS continues to crack
down on what it perceives as a “misuse of trusts,”
where unscrupulous promoters promise to reduce
income by claiming a deduction for various personal
expenses that are not allowed under the tax law.
The IRS has pursued both civil and criminal sanc-
tions against those participating in these trusts. It
has included misuse of trusts in its “Dirty Dozen”
list of tax scams in which the IRS said it has seen
an increase in the improper use of private annuity
trusts and foreign trusts to divert income and deduct
personal expenses (IR-2009-41, 4/13/09).
For a listing of trusts that the IRS has classified
as abusive, go to www.irs.gov/businesses/small/
article/0,,id=106553,00.html
STUDY QUESTIONS
8. In 2009, a mother and father each create a trust
with their child as the beneficiary (and there is no
reason other than tax avoidance for the two trusts).
For tax purposes, which statement is correct?
a. Each trust must file a separate Form 1041.
b. Income and expenses from both trusts are
aggregated for reporting purposes.
c. Income and expenses of each trust are
reported separately, so that each trust can
claim an exemption amount.
9. Assume an Alaska Native settlement trust makes a
Section 646 election. Which statement is correct?
a. The trust pays a flat tax rate on ordinary
income of 10 percent.
b. The trust pays tax on ordinary income at
graduated rates for trusts and estates.
c. The trust pays no tax—all income is distrib-
uted to the beneficiaries who pay tax.
ESTATES
A separate taxpaying entity, an estate, comes into being
at the death of a decedent and continues until the estate
administration concludes and the estate terminates. This
is so even though the probate process may not actually
begin until weeks or months after the decedent’s death.
1041_Prep_Book_10.indb 17
M O D U L E 1 — C H A P T E R 2 — O v e r v i e w o f Tr u s t s a n d E s t a t e s 17
PRACTICE POINTER: A copy of the decedent’s will
does not need to be filed with the estate’s income
tax return unless the IRS requests it.
A bankruptcy estate is created when an individual files
a petition under either Chapter 7 or 11 of Title 11 of
the U.S. Code. A separate taxpayer is not created when
a partnership or corporation files for bankruptcy under
any chapter of Title 11 of the U.S. Code.
PITFALL: The filing of a tax return for a bankruptcy
estate does not relieve the individual debtor of his
or her individual tax obligations.
Foreign Estates
Where a decedent is a nonresident alien, the estate is still
taxed on U.S. source income. If a foreign estate was the
grantor of or made transfers to a foreign trust, this fact
must be disclosed on line 4, page 2 of Form 1041, in the
“Other Information” section. The estate may have to file
Form 3520, Annual Return to Report Transactions with
Foreign Trusts and Receipt of Certain Foreign Gifts.
STUDY QUESTION
10. Which statement concerning a bankruptcy estate
is correct?
a. It is created when any taxpayer (individual,
partnership, or corporation) files for bank-
ruptcy under Title 11 of the U.S. Code.
b. It is created when an individual files a petition
under either Chapter 7 or 11 of Title 11 of the
U.S. Code.
c. Once a bankruptcy estate comes into be-
ing, the bankrupt person no longer has to
file a return.
RECENT DEVELOPMENTS
The IRS has identified a transaction involving charitable
remainder trusts as a transaction of interest for purposes
of the reportable transaction rules (Notice 2008-99, IRB
2008-47, 1194).
The IRS will not rule on various trust and estate mat-
ters—including whether the settlement of a charitable
remainder trust upon the termination of the nonchari-
table interest is made within a reasonable period of time,
or the period of administration or settlement of an estate
is reasonable or unduly prolonged (Rev. Proc. 2009-3,
IRB 2009-1, 107).
10/19/2009 10:13:43 AM
 18 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E

Tax-free division of a single charitable remainder trust The IRS has released sample forms for inter vivos and
into separate trusts is allowed without adverse tax results testamentary charitable lead trusts (Rev. Proc. 2008-
(Rev. Rul. 2008-41, IRB 2008-30, 170). 45, IRB 2008-30, 224, and Rev. Proc. 2008-46, IRB
2008-30, 238).

1041_Prep_Book_10.indb 18 10/19/2009 10:13:43 AM

 3
MODULE 1 — TAX FUNDAMENTALS FOR TRUSTS AND ESTATES

General Information

LEARNING OBJECTIVES INFORMATION ON THE TRUST OR ESTATE

(PAGE 1 OF FORM 1041)
This chapter will assist readers in completing the fidu-
ciary income tax return. On line A, check the box next to the appropriate type
of entity:
Upon completion, you will be able to:
Decedent’s estate
Complete the basic information on the top of page Simple trust
1 of Form 1041 Complex trust
Answer the questions in the “Other Information” Qualified disability trust
section on page 2 of Form 1041 Electing small business trust (ESBT—S portion only)
Grantor-type trust
INTRODUCTION
Bankruptcy estate under Chapter 7
Form 1041 is a two-page form with various supporting Bankruptcy estate under Chapter 11
forms and schedules. Start to complete the return by Pooled income fund
filling in the general information on lines A through
G (see below). At the top of the form, fill in the calendar or fiscal year
beginning and ending dates (see the Tax Year section on
page 20), the name of the estate or trust, the name and
PRACTICE POINTER: The 2009 version of Form 1041 title of the fiduciary, and the fiduciary’s address.
is essentially the same as the version for 2008.
Unlike the version prior to 2008, Schedule I, Al- On line B at the top of the return, enter the number of
ternative Minimum Tax—Estates and Trusts, is a Schedules K-1 attached. Essentially, the number of K-1s is
separate form and is no longer part of the body of the same as the number of beneficiaries that are required
Form 1041. to be informed of trust or estate income, deductions, etc.
allocated to them.
Department of the Treasury—Internal Revenue Service
1041
Form

U.S. Income Tax Return for Estates and Trusts 2009 OMB No. 1
A Type of entity (see instr.): For calendar year 2009 or fiscal year beginning , 2009, and ending
Decedent’s estate Name of estate or trust (If a grantor type trust, see page 14 of the instructions.) C Employer identification

f
Simple trust
Name and title of fiduciary D Date entity created

o
Complex trust
Qualified disability trust
Number, street, and room or suite no. (If a P.O. box, see page 15 of the instructions.) E Nonexempt charitable and

s
ESBT (S portion only)
interest trusts, check app
Grantor type trust boxes (see page 16 of the

a 9
Bankruptcy estate-Ch. 7 Described in section 494
City or town, state, and ZIP code

t
Bankruptcy estate-Ch. 11 Not a private foundation

f 0
Pooled income fund Described in section 494

0
B Number of Schedules K-1 F Check

a
Initial return Final return Amended return Change in trust's name
attached (see applicable

2
instructions) 

r
boxes: Change in fiduciary Change in fiduciary's name Change in fiduciary's add

/
G Check here if the estate or filing trust made a section 645 election . . . . . . 

D
1041_Prep_Book_10.indb 19 10/19/2009 10:13:43 AM
 20 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
NOTE: A decedent’s estate does not need to attach
a copy of the decedent’s will to the Form 1041. The
executor does, however, need to attach a copy of
the will to the decedent’s federal estate tax return
(Form 706).
On line C at the top of the return, enter the employer
identification number (EIN) for the entity. All estates
and trusts that are required to file income tax returns
must have an EIN. A decedent’s estate may not use the
decedent’s Social Security number as its EIN.
To obtain the EIN, the fiduciary should file Form SS-4.
If the entity has not obtained an EIN by the time it files
a return, enter “Applied for” on line C.
PRACTICE POINTER: Form SS-4 can be ob-
tained online at www.irs.gov/businesses/small/
article/0,,id=102767,00.html.
The EIN Assistant is an online application process
that gives you an EIN immediately upon verification.
You can receive a verification letter from the IRS.
NOTE: The online EIN Assistant may not be used
by a foreign filer.
On line D at the top of the return, enter the date that
the entity was created. This is the date of the decedent’s
death, the filing of a petition in bankruptcy in the case
of an estate, or the date of the execution of the trust
instrument in the case of a trust.
On lines E, F, and G at the top of the return, check any of
the special boxes that apply. There are boxes for nonexempt
charitable trusts and split-interest trusts. Indicate if:
The return is an initial return, amended return, or
final return
There has been a change in the name of the trust
There has been a change in the fiduciary or in the
fiduciary’s name or address
Check box G to indicate if the estate or filing trust has
made a Section 645 election, as explained in Chapter 2.
Tax Year
Trusts (other than grantor trusts and revocable trusts that
elect to be treated and taxed as part of the estate) are re-
quired to use a calendar year. Estates, including bankruptcy
estates, can use a calendar or fiscal year. The advantages to
using a fiscal year are discussed in Chapter 11.
1041_Prep_Book_10.indb 20
PRACTICE POINTER: Revocable trusts that elect to
be treated and taxed as part of the estate can use a
fiscal year—the same fiscal year as the estate.
This enables some tax deferral planning for the
trusts and their beneficiaries. For grantor trusts that
are wholly-owned by the grantor, deferral is not an
issue; since trust items are taxed to the grantor, the
trust uses the same tax year as the grantor (Rev. Rul.
90-55, 1990-2 CB 161).
If the entity is using a calendar year, nothing special
must be noted. If the estate is using a fiscal year, enter
the beginning and ending date of the entity’s tax year for
which the return relates. Similarly, if the return is for a
short year for an entity, fill in the applicable period at
the top of the return.
A 2009 Form 1041 is filed for the calendar year 2009
and fiscal years beginning in 2009. The 2009 Form 1041
may also be filed for a tax year beginning in 2010 if the
entity has a tax year less than 12 months that begins in
2010 and the 2010 Form 1041 is not available at the
time the entity is required to file its return.
PRACTICE POINTER: If using a 2009 Form 1041 for
a tax year beginning in 2010, be sure to incorporate
any tax law changes effective for 2010.
STUDY QUESTIONS
1. An estate or trust that is required to file Form 1041
must obtain an employer identification number.
True or False?
2. Which type of entity is required to use a calendar
year to report income?
a. Charitable remainder trust
b. Decedent’s estate
c. Bankruptcy estate
NOTE: Answers to Study Questions, with feedback
to both the correct and incorrect responses, are pro-
vided in a special section beginning on page 101.
SPECIAL FILING INSTRUCTIONS
FOR BANKRUPTCY ESTATES
In the case of bankruptcy estates, Form 1041 is only
a transmittal for Form 1040. Attach Form 1040 to
Form 1041. In the top margin of Form 1040, write
“Attachment to Form 1041. DO NOT DETACH.”
10/19/2009 10:13:44 AM
 MODULE 1 — CHAPTER 3 — General Information 21

g p g , 7
Other Information Yes No
1 Did the estate or trust receive tax-exempt income? If “Yes,” attach a computation of the allocation of expenses
Enter the amount of tax-exempt interest income and exempt-interest dividends  $
2 Did the estate or trust receive all or any part of the earnings (salary, wages, and other compensation) of any
individual by reason of a contract assignment or similar arrangement? . . . . . . . . . . . . . . .
3 At any time during calendar year 2009, did the estate or trust have an interest in or a signature or other authority
over a bank, securities, or other financial account in a foreign country? . . . . . . . . . . . . . .
See page 29 of the instructions for exceptions and filing requirements for Form TD F 90-22.1. If “Yes,” enter the
name of the foreign country 
4 During the tax year, did the estate or trust receive a distribution from, or was it the grantor of, or transferor to, a
foreign trust? If “Yes,” the estate or trust may have to file Form 3520. See page 29 of the instructions . . . .
5 Did the estate or trust receive, or pay, any qualified residence interest on seller-provided financing? If “Yes,” see
page 30 for required attachment . . . . . . . . . . . . . . . . . . . . . . . . . . .
6 If this is an estate or a complex trust making the section 663(b) election, check here (see page 30) . . 
7 To make a section 643(e)(3) election, attach Schedule D (Form 1041), and check here (see page 30) . . 
8 If the decedent’s estate has been open for more than 2 years, attach an explanation for the delay in closing the estate, and check here 
9 Are any present or future trust beneficiaries skip persons? See page 30 of the instructions . . . . . . . .
Form 1041 (2009)

Complete only the identification area at the top of
Form 1041.
Enter the name of the individual debtor (e.g., John
Doe, Public Bankruptcy Estate). Beneath this entry,
write the name of the trustee in bankruptcy (e.g., Sue
Smith, Trustee). In item D, enter the date the peti-
tion was filed or the date of conversion to a chapter
7 or 11 case.
foreign bank account. This form is due by June 30, 2010,
and is filed with the Department of the Treasury at the
address shown on the return.
PRACTICE POINTER: Do not file Form TD F 90-
22.1 with Form 1041. Form TD F 90-22.1 is not a
tax return.
Failure to file this form with the Treasury can result in
a penalty of up to $10,000 (more in some cases).

OTHER INFORMATION (PAGE 2 OF FORM 1041)

The bottom portion of page 2 of Form 1041 requires
additional information (see above). Some of this in-
formation is provided merely as a response to a yes/
no question.
Line 4. Indicate whether the entity received a distribu-
tion from, was a grantor of, or transferor to a foreign
trust. If yes, file Form 3520, Annual Return to Report
Transactions with Foreign Trusts and Receipt of Certain
Foreign Gifts if required to do so.

Line 1. Indicate whether the entity received any tax-exempt

income. If so, the entity must compute an allocation of
expenses to such income. The allocation is explained in
Chapter 4. The allocation is necessary for purposes of
computing the income distribution deduction discussed in
Chapter 6. Also enter the dollar amount of any tax-exempt
interest income and exempt-interest dividends received.
Line 2. Indicate whether the entity received any earnings
under a contract assignment or similar arrangement (e.g.,
salary, wages, and other compensation).
Line 3. Indicate whether the entity had an interest in or a
signature or other authority over a foreign bank, foreign
securities, or other foreign accounts at any time during
the calendar year 2009. If yes, then enter the name of the
foreign country. Also file Form TD F 90-22.1, Report of
Foreign Bank and Foreign Financial Accounts if the interest
is more than $10,000 or if the entity owns more than
50 percent of the stock of any corporation that owns a
PRACTICE POINTER: An owner of a foreign trust
must ensure that the trust files an annual information
return on Form 3520-A, Annual Information Return
of Foreign Trust with a U.S. Owner.
Line 5. Indicate whether the entity received or paid any
qualified residence interest on seller-provided financing.
If yes, then attach a statement showing name, address,
and taxpayer identification number (TIN) of the seller
who is being paid the interest from the entity or the
buyer who is paying interest to the entity. Provide the
identical statement to the person liable for such interest
(i.e., the buyer).
Line 6. Indicate whether an estate or complex trust is
making an election under Code Sec. 663(b). This is
an election to treat any amount paid or credited to a
beneficiary within 65 days following the close of the
tax year as being paid or credited on the last day of the

1041_Prep_Book_10.indb 21 10/19/2009 10:13:44 AM

 22 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
tax year for this return. This election is made by the ex-
ecutor of a decedent’s estate or the trustee of a complex
trust. Once made, it is irrevocable. It must be made on
a timely filed return.
Line 7. Indicate whether the entity is making an election
under Code Sec. 643(e)(3) to recognize gain on property
distributed in kind. If so, then the entity must attach
Schedule D (Form 1041) to the return.
The Section 643(e) election permits the fiduciary to
choose whether the entity or the beneficiary reports gains
or losses on property that is distributed in kind. This
decision impacts the distributable net income (DNI)
and, thus, the amount taxed to the entity.
EXAMPLE: Assume a complex trust has DNI of
$55,000 and that the only distribution for the year
is a distribution of property with a basis of $10,000
and a value of $25,000. If the election is not made,
then the trust claims a distribution deduction of
$10,000 (the basis of the property distributed to
the beneficiary), leaving $45,000 of taxable income
remaining in the trust. If the election is made, then
the distribution deduction is $25,000 (the value of
the property distributed to the beneficiary), leaving
$30,000 of ordinary income and $15,000 of capital
gains in the trust.
Line 8. For decedent’s estates only, indicate if the estate
has been open for more than two years. If so, attach an
explanation for the delay:
The IRS has ruled that an estate that continues to
hold S corporation stock during the period that the
estate is paying estate tax in installments under Code
Sec. 6166 is not considered to be using an unreason-
ably prolonged time to keep the estate open (Letter
Ruling 200226031).
The IRS will not issue an advance ruling on whether
an estate has been open for an unreasonably long
period (Rev. Proc.2008-3, IRB 2008-1, 110).
1041_Prep_Book_10.indb 22
STUDY QUESTIONS
3. All of the following questions must be answered in
the “Other Information” section on page 2 of Form
1041, except:
a. The dollar amount of any tax-exempt income
received
b. Whether the entity has an interest in or sig-
nature or other authority over a foreign bank
account, foreign securities or other foreign
accounts during the calendar year
c. The date the entity was created
4. An estate that has been open for more than two
years must attach an explanation to the return.
True or False?
Line 9. For trusts only, indicate whether there are any
present or future trust beneficiaries who are skip persons
(usually a beneficiary in a generation that is two or more
generations below the generation of the transferor to
the trust). The determination of whether a beneficiary
is a skip person is made under the generation-skipping
transfer tax rules. For general rules on making this
determination, see the instructions to Schedule R of
Form 706.
STUDY QUESTIONS
5. A trust must indicate in the “Other Information”
section on page 2 of Form 1041 whether the trust
had any interest in a foreign bank account. True
or False?
6. Which of the following items are included in the “Other
Information” section on Page 2 of Form 1041?
a. The type of entity
b. The number of Schedule K-1s attached
c. Whether there are any present or future trust
beneficiaries who are skip persons
10/19/2009 10:13:45 AM

MODULE 1 — TAX FUNDAMENTALS FOR TRUSTS AND ESTATES
Fiduciary Accounting
LEARNING OBJECTIVES
This chapter will enable participants to gain a quick
overview of fiduciary accounting.
Upon completion, you will understand:
The nature and importance of fiduciary accounting
The impact of the Uniform Principal and Income
Act on tax reporting
How to allocate expenses between income and
principal
NEW THIS YEAR
Fiduciaries should check their state law to de-
termine adoption of the 2008 amendments to
the Uniform Principal and Income Act and its ef-
fect on fiduciary accounting. (www.nccusl.org/
Update/uniformact_factsheets/uniformacts-
fs-upia08.asp).
INTRODUCTION
Since the fiduciary income tax return is a unique taxing
arrangement in which the entity reports some items
and some are passed through to the beneficiary, the
tax preparer must use special accounting rules . While
the result of fiduciary accounting is reported on the
return, there is no IRS form for making the calcula-
tions; instead, computations are made on self-prepared
statements or schedules.
NATURE AND IMPORTANCE
OF FIDUCIARY ACCOUNTING
The fiduciary return rules are designed to allow each
taxpayer (fiduciary and beneficiary) to properly report
his or her share of income and deductions. Fiduciary
accounting is also used to figure the income distribution
deduction unique to the fiduciary return.
Fiduciary accounting is not the same as tax account-
ing (trust accounting income and taxable income are
not necessarily the same). Fiduciary accounting is not
governed by generally accepted accounting principles
1041_Prep_Book_10.indb 23
4
(GAAP). Fiduciary accounting is concerned only with
the allocation of income and principal (also referred to
as corpus).
For the most part, fiduciary accounting concerns inter-
est income (taxable and tax-exempt), dividends, rental
income and business income (including income from
sole proprietorships and partnerships). Capital gains
usually are not part of fiduciary accounting (although
this is somewhat modified by the regulations under
Code Sec. 643, discussed below). On the expense side,
fiduciary accounting generally considers those expenses
allocated to income (including a reasonable depreciation
allowance). Limitations, such as the 2 percent floor on
certain expenses and the passive activity loss rules, are
not taken into account.
With the exception of amortization, depreciation and
depletion, fiduciary accounting generally uses the cash
method of accounting.
Complex trusts must report fiduciary accounting income
on Schedule B of Form 1041. However, there is no special
IRS form for figuring fiduciary accounting income.
STUDY QUESTION
1. With respect to fiduciary accounting, which state-
ment is not correct?
a. There is a special IRS form used to figure
fiduciary accounting income.
b. Fiduciary accounting is used to compute the
distribution deduction.
c. Complex trusts figure fiduciary accounting
income on Schedule B.
NOTE: Answers to Study Questions, with feedback
to both the correct and incorrect responses, are pro-
vided in a special section beginning on page 101.
UNIFORM PRINCIPAL AND INCOME ACT
The Uniform Principal and Income Act (UPAIA) is a
series of laws, adopted by most states, that is used to
10/19/2009 10:13:45 AM
 24 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
determine what is principal and what is income of a
trust or an estate. The purpose of the new act, like its
predecessors, is to provide procedures for fiduciaries ad-
ministering a trust or an estate to separate principal from
income, and to ensure that the intention of the entity’s
creator is the guiding principle for the fiduciaries.
The newest version of the UPAIA was enacted in 1997
(“revised law”), with amendments made in 2008. The
amendments were made to conform to IRS policy and to
clarify certain technical language. The amendments have
been adopted in Idaho, North Dakota, South Dakota,
Virginia, and Utah.
The following chart lists states that have introduced the
2008 amendments but have not yet adopted them:
Arizona Nebraska
California New Mexico
Colorado Oklahoma
Connecticut Washington
Indiana West Virginia
Principal means property held in trust for distribution
to a remainder beneficiary when the trust terminates.
More specifically, principal includes funds used to create
the trust as well as gain (or loss) resulting from the sale
or other disposition of property and increases due to
liquidating distributions from corporations. Examples of
principal in a decedent’s estate include the following:
Legacies paid to beneficiaries
Gains and losses on assets as they are sold
Assets held by the estate on the date of death
Income means “money or property that a fiduciary re-
ceives as current return from a principal asset.” Examples
of income include interest income, dividends (to the
extent not included as principal such as liquidating
dividends) and net income from rental real estate or
other property.
The UPAIA authorizes the trustee to make allocations
of some principal to income (and some income to prin-
cipal) in order to distribute a “fair share” to the income
beneficiary. This rule has been necessitated because of the
generally low yields on income-generating instruments
(e.g., less than two percent for interest-bearing money
market funds and CDs). To make an equitable adjust-
ment, a trustee must take into account all the facts and
circumstances, including nature, purpose and expected
duration of the trust, the grantor’s intent, the needs of
the beneficiaries, the types of property held by the trust
1041_Prep_Book_10.indb 24
and the anticipated effects of inflation, taxes and other
economic conditions.
PRACTICE POINTER: How do trustees know if they
have sufficient authority under trusts established
before the UPAIA to make these allocations? Gen-
eral trustee powers, such as the ability to make tax
elections or allocations, must be sufficient under the
governing instrument and/or applicable state law to
authorize a trustee’s actions in this regard.
PRACTICE POINTER: In some states, the trustee
has discretion to convert a trust to a noncharitable
unitrust if the trust beneficiaries have no objection
and certain other conditions are satisfied. This al-
lows a specified percentage of trust principal (e.g.,
four percent) to be treated as “income” annually,
providing the trustee with authority for making dis-
tributions to income beneficiaries. For example, in
New York under the revised Uniform Prudent Investor
Act (UPIA), trustees are empowered to create a four
percent unitrust.
What is a reasonable apportionment under UPAIA? Ac-
cording to the IRS, an allocation of no less than three
percent and no more than five percent of trust princi-
pal in a unitrust is a reasonable apportionment (Reg.
§1.643(b)-1; amended 12/30/03, T.D. 9102). This rule
applies to tax years ending after January 2, 2004.
PRACTICE POINTER: The impact of the UPAIA is to
give fiduciaries greater investment flexibility. In effect,
fiduciaries can make investment choices without be-
ing viewed as favoring one class of beneficiary over
another class: both income and remainderman can
benefit from this increased flexibility.
PITFALL: The UPAIA cannot be used to override the
wishes of a grantor that have been expressed in a
trust or the wishes of a decedent that are expressed
in a will.
ALLOCATING RECEIPTS
BETWEEN INCOME AND PRINCIPAL
In general, income passes through (i.e., is allocated) to
a beneficiary while principal stays with the entity. The
governing instrument is the primary guide to the alloca-
tion. Local state law (the state’s version of the UPAIA)
is secondary.
10/19/2009 10:13:45 AM

EXAMPLE: A trust instrument to which pension ben-
efits are paid specifically instructs that 85 percent of
such distributions be allocated to principal and 15
percent to income.
This trust instruction governs the allocation of the
pension benefits in this case. But if the trust instru-
ment is silent, then state law (and its version of the
UPAIA) dictates the allocation.
Allocations generally follow a common sense approach
but can be altered by the trust document or state law.
Typical income items, such as interest income, dividends,
and business profits, are allocated to income, while short-
term and long-term capital gains are usually allocated
to principal. The allocation of capital gains is made on
Schedule D of Form 1041. Allocations of income to the
beneficiaries are reported on Schedule K-1.
Regulations give trustees some discretion in the alloca-
tion of items between income and principal, taking into
account the impact of the UPAIA (Reg. §1.642(c)-2,
Reg. §1.643(a)-3, Reg. §1.643(b)-1; Reg. §1.651(a)-2;
Reg. §1.661(a)-2 and Reg. §1.664-1(a)-3). This discre-
tion is necessary in view of the prudent investor standard
that allows trustees to invest more heavily in stocks and
less in bonds and to later make equitable allocations of
capital gains to compensate income beneficiaries.
STUDY QUESTIONS
2. Which statement concerning the most recent
version of the Uniform Principal and Income Act
is correct?
a. All states have now adopted the latest ver-
sion of the Act.
b. The trustee is authorized to distribute a “fair
share” to the income beneficiary.
c. Net income from rental real estate is consid-
ered to be principal.
3. Under the most recent version of the Uniform
Principal and Income Act, a trustee may have
discretion to convert a trust to a noncharitable
unitrust. True or False?
4. If a trustee elects under the UPAIA to create a non-
charitable unitrust, a reasonable apportionment is:
a. 2 percent
b. 4 percent
c. 6 percent
1041_Prep_Book_10.indb 25
MODULE 1 — CHAPTER 4 — Fiduciary Accounting 25
5. What is the primary guide to allocating the income
and principal of an entity?
a. Trustee’s discretion
b. State law
c. Governing instrument
ALLOCATING EXPENSES BETWEEN
INCOME AND PRINCIPAL
Deductions that are allocated to the fiduciary are reported
on page 1 of Form 1041 and reduce income taxed to the
entity. Deductions that are allocated to the beneficiary
are reported on Schedule K-1, as well as being taken into
account in figuring accounting income on Schedule B.
As in the case of allocations of income, allocations of
expenses are also based on the governing instrument and
local law. Deductions allocable to corpus are deductible
by the fiduciary; deductions allocable to income are
deductible by the beneficiary.
EXAMPLE: Under New York law, accounting fees are
allocated entirely to income; fiduciary income taxes
are allocated entirely to principal; regular trustee
commissions are allocated one-half to income and
one-half to corpus, except for trustee commissions
relating to a final distribution, which are allocated
entirely to corpus.
Expenses allocable to corpus include losses from a trade or
business or from the sale of property and casualty losses.
STUDY QUESTIONS
6. Deductions allocated to the fiduciary are re-
ported on:
a. Page 1 of Form 1041
b. Schedule B
c. Schedule K-1
7. Deductions generally allocated to principal include
all of the following except:
a. Losses from a trade or business
b. Casualty losses
c. Fiduciary fees
10/19/2009 10:13:45 AM
 26 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
Depreciation, Depletion,
and Amortization Allocation
Special rules are used for allocating depreciation, deple-
tion, and amortization (Code Sec. 642(e) and (f )):
The entity can claim depreciation, depletion, or
amortization only to extent the deduction is not al-
located to the beneficiary.
For property held by an estate, the deduction is al-
located between heirs, legatees, and devisees on the
basis of income allocable to each.
For property held by a trust, the deduction is allocated
between the income beneficiary and the fiduciary on
the basis of trust income allocable to each, unless the
governing instrument requires or permits the trustee
to maintain a depreciation reserve. If so, depreciation
is first allocated to the trust up to the amount of the
reserve, with any excess allocated to the beneficiary
according to the accounting rules.
A trust that holds mortgaged property that, under
the terms of the governing instrument, charges pay-
ments of principal on the note against trust income
for purposes of the income distribution deduction
must allocate a portion of depreciation to the trust
(Rev. Rul. 90-82, 1990-2 CB 44).
Trusts and estates may not use the Code Sec. 179 first-
year expense deduction (Code Sec. 179(d)(4)).
PRACTICE POINTER: Under the American Recovery
and Reinvestment Act of 2009, trusts and estates can
claim 50 percent bonus depreciation or apportion
such deduction to beneficiaries for 2009.
PRACTICE POINTER: For 2009, Form 4562, Depre-
ciation and Amortization, is filed only if depreciable
property is placed in service in 2009, amortization of
costs begins in 2009, there is depreciation of listed
property (regardless of when it was placed in service),
or there is a deduction for a vehicle reported on any
form other than Schedule C (or C-EZ).
ALLOCATING DEDUCTIONS WHEN THE
ENTITY RECEIVES TAX-EXEMPT INCOME
Generally, no deduction is allowed for expenses allocable
to tax-exempt income. Tax-exempt income includes,
for example, interest on state and local bonds (Code
Sec. 103), compensation for injuries or sickness (Code
Sec. 104), and income from the discharge of indebted-
ness (Code Sec. 108). However, there is an important
1041_Prep_Book_10.indb 26
exception to this rule. State income taxes and business
expenses that are allocable to tax-exempt income can
be deducted.
Expenses that are directly related to tax-exempt income
are allocated only to that income. A reasonable proportion
of expenses indirectly related to both tax-exempt income
and other income are allocated to each class of income.
In making the allocation between tax-exempt and other
income, determine the percentage of tax-exempt income
to gross income. Do this by dividing tax-exempt income
by the total of all items of gross income, including tax-
exempt income.
EXAMPLE: A trust received $2,000 of tax-exempt
interest, $8,000 of taxable dividends, and no other
income. The percentage of tax-exempt income to
gross income is 20 percent (tax-exempt income of
$2,000 divided by total gross income of $10,000).
Then determine the excludable amount of each specific de-
duction by applying the percentage to each deduction.
EXAMPLE: The trust described in the example above
incurred an accounting fee of $500. The excludable
(nondeductible) portion is $100 (20 percent of $500).
Then determine the deductible amount by subtracting
the excludable portion from the specific deduction.
EXAMPLE: The trust described in the example above
can deduct $400 of the $500 accounting fee ($500
less $100 excludable portion).
If the trust or estate receives rental income, the gross
rent income is used in allocating deductions related to
tax-exempt income. Rent expenses are not netted against
rent income in making the allocation.
STUDY QUESTION
8. A trust receives tax-exempt interest income on mu-
nicipal bonds. Which statement is not correct?
a. All deductions allocated to this income gen-
erally are deductible.
b. Expenses directly related to this income are
allocated solely to this income.
c. Expenses indirectly related to this income are
apportioned to this income.
10/19/2009 10:13:45 AM
 MODULE 1 — CHAPTER 4 — Fiduciary Accounting 27

For purposes of fiduciary accounting, capital gains al-

PRACTICE POINTER: Attach a statement to the re-
located to principal are ignored and are not taken into
turn showing the allocation of deductions when the
account in the fiduciary’s gross income (Manufacturers entity receives tax-exempt income.
Hanover Trust Co., Cl. Ct., 312 F.2d 785 (1963)).
However, capital gains allocated to income may be in-
cluded as part of the fiduciary’s gross income (Rev. Rul.
CPE NOTE: When you have completed your study
77-355, 1977-2 CB 82). and review of this Module, you may wish to take the
Quizzer for this Module.
PRACTICE POINTER: Expenses related to tax-ex-
For your convenience, you can also take this Quizzer
empt income of an estate that cannot be deducted on
online at www.cchtestingcenter.com
the fiduciary’s income tax return may be deductible
on the federal estate tax return (Form 706).

1041_Prep_Book_10.indb 27 10/19/2009 10:13:45 AM

1041_Prep_Book_10.indb 100 10/19/2009 10:14:06 AM
 1041 PREPARATION AND PLANNING GUIDE
Answers to Study Questions
CHAPTER 1 — Introduction
1. True. Correct. IRS statistics show that the number
of fiduciary returns is expected to increase annually
through 2010.
False. Incorrect. There is no evidence to support a con-
clusion that the number of filings for fiduciary returns
will flatten or decline.
2. a. Incorrect. Income distributed to the beneficiary is
not taxed to the trust.
b. Correct. Income distributed to the beneficiary is
taxed to that beneficiary. In this sense, the Form 1041
acts as an information return and supports the conduit
theory.
c. Incorrect. Taxes are not apportioned between the
trust and beneficiary when income is distributed to
the beneficiary.
3. a. Incorrect. The Schedule C that is used with Form
1041 is the same Schedule C that is used with Form
1040.
b. Correct. There is a special Schedule D used solely
for Form 1041.
c. Incorrect. The Schedule E that is used with Form 1041
is the same Schedule E that is used with Form 1040.
4. a. Correct. A fiduciary can be an individual or a
corporation, such as a bank trust department.
b. Incorrect. Tax law imposes personal liability on the
fiduciary for filing the fiduciary return.
c. Incorrect. The fiduciary of a bankruptcy estate is
called a trustee, even though the fiduciary of a decedent’s
estate is called an executor.
5. a. Incorrect. The election does apply only to complex
trusts and estates.
b. Incorrect. The election is irrevocable with respect to
the return for which it is made.
c. Correct. A new election must be made each year
if desired.
1041_Prep_Book_10.indb 101
6. a. Correct. Interest earned on a savings account after the
date of death is not income in respect of a decedent.
b. Incorrect. Deferred salary payments payable to a dece-
dent’s estate are income in respect of a decedent because
the decedent earned the money before death.
c. Incorrect. Funds in a traditional IRA are income in
respect of a decedent because the funds were not taxed
to the decedent during his or her lifetime.
7. a. Incorrect. Estates of decedents with gross income
of $600 or more or a nonresident alien beneficiary must
file a return.
b. Incorrect. Bankruptcy estates with gross income of
$9,350 or more in 2009 must file a return.
c. Correct. Revocable trusts created after 1980 where
the grantor is treated as the owner of all trust assets
and acts as trustee (so-called living trusts) do not have
to file a return. All of the income is reported on the
grantor’s personal income tax return.
8. a. Incorrect. One of the benefits to making the elec-
tion is that the active participation rules under Code
Sec. 469 are waived for two years after the death of the
grantor/decedent.
b. Correct. By making the election, the trust is
relieved of the requirement to make estimated tax
payments for at least two years following the dece-
dent’s death.
c. Incorrect. One of the benefits to making the election is
that the trust can claim a charitable contribution deduc-
tion for amounts permanently set aside for charity without
the requirement that such amounts actually be paid.
9. a. Incorrect. March 15, 2010, is the due date for an
estate with a November 30, 2009, fiscal year end.
b. Incorrect. April 15, 2010, is the due date for calendar-
year estates and trusts to file their 2009 returns.
c. Correct. The return is due on the 15th day of
the fourth month following the close of the estate’s
tax year, making September 15, 2010, the due date
for the 2009 return for an estate with a fiscal year
ending on May 31.
10/19/2009 10:14:06 AM
 102 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
10. True. Correct. The fiduciary return for both es-
tates and trusts can obtain an automatic five-month
filing extension.
False. Incorrect. In the past, an estate was not able to
obtain an automatic filing extension, but a regulation
change made automatic extensions possible.
11. a. Incorrect. An IRS-designated private delivery
service can be used to satisfy the timely mailed as timely
filed/paid rule.
b. Incorrect. Form 1041 returns can be e-filed.
c. Correct. A decedent’s Form 1041 is filed in the
service center where the fiduciary is located, not
where the decedent was domiciled.
CHAPTER 2 — Overview of Trusts and Estates
1. True. Incorrect. The fact that a trust is a simple trust
can change, depending on the type of trust distribu-
tions.
False. Correct. A simple trust will become a complex
trust in any year that it distributes principal.
2. a. Correct. The trust does not have to provide that
corpus be payable to the disabled individual’s estate
upon the death of the disabled person. The corpus
may revert to a person who is not disabled.
b. Incorrect. The law does require that the trust be set
up by a parent, grandparent, legal guardian, or court for
the benefit of a disabled person.
c. Incorrect. The law requires that the disabled person
be under the age of 65.
3. a. Correct. The trust is tax-exempt (unless there is
unrelated business income).
b. Incorrect. By definition, the income beneficiary is not a
nonprofit organization and, therefore, is not tax-exempt.
c. Incorrect. The income beneficiary is not tax-exempt.
4. a. Incorrect. A qualified Subchapter S trust (QSST)
is a simple trust because it is required to distribute all of
its income annually.
b. Correct. A charitable remainder trust (CRT) does
not necessarily distribute all of its income annually
and, therefore, is not a simple trust.
c. Incorrect. A qualified terminable interest property
trusts (QTIP) is a simple trust because it is required to
distribute all of its income annually (other than in the
year of termination when it becomes a complex trust).
1041_Prep_Book_10.indb 102
5. a. Incorrect. The trustee of a qualified disability trust
does not have to distribute income annually, so the trust
is a complex trust.
b. Incorrect. Income can be accumulated in an electing small
business trust (ESBT), so the trust is a complex trust.
c. Correct. The definition of a simple trust is a trust
that requires the current distribution of all income,
prohibits the distribution or use of trust funds for
charitable purposes, and does not distribute amounts
attributable to corpus.
6. a. Incorrect. While a QSST is usually a simple trust
because it is required to distribute all of its income
annually, it will become a complex trust if it makes
principal distributions.
b. Incorrect. While a QSST will be a complex trust
if it makes principal distributions, it is not always a
complex trust.
c. Correct. A QSST is usually a simple trust, but it
becomes a complex trust when it distributes principal
(e.g., upon termination).
7. a. Incorrect. The income from the separate trust is
taxed at a flat rate, which is the highest marginal rate
on trusts and estates (e.g., in 2009 it is 35 percent on
ordinary income and 15 percent on capital gains).
b. Incorrect. No item relating to S corporation stock
may be allocated to the beneficiary.
c. Correct. The separate trust may not use the exemp-
tion allowed to complex trusts.
8. a. Incorrect. A single Form 1041 must be filed for
both trusts.
b. Correct. Income and expenses from both trusts
are aggregated for reporting purposes. The trusts are
treated as a single trust for reporting purposes.
c. Incorrect. Separate reporting of income and expenses
for each trust is not allowed. Both trusts are combined
and claim a single exemption amount.
9. a. Correct. By making a Section 646 election, the trust
pays a flat tax rate on ordinary income at the lowest
federal tax rates for unmarried individual taxpayers,
which is currently 10 percent.
b. Incorrect. After making a Section 646 election, the
trust no longer pays tax on ordinary income at the gradu-
ated rates for trusts and estates.
c. Incorrect. The trust generally accumulates funds for
the benefit of the health, education and welfare of the
Native Americans. The trust, not the beneficiaries, pays
the tax on ordinary income.
10/19/2009 10:14:06 AM

10. a. Incorrect. No bankruptcy estate is created when
a partnership or corporation files for bankruptcy under
Title 11 of the U.S. Code.
b. Correct. A bankruptcy estate is created when an
individual files a petition under either Chapter 7 or
11 of Title 11 of the U.S. Code.
c. Incorrect. Filing a tax return for a bankruptcy estate
does not relieve the individual debtor of his or her indi-
vidual tax obligations.
CHAPTER 3 — General Information
1. True. Correct. An estate or trust that is required
to file Form 1041 must obtain an employer iden-
tification number.
False. Incorrect. The beneficiary’s or trustee’s personal
EIN may not be used.
2. a. Correct. All trusts, including charitable remain-
der trusts, are required to use a calendar year (the only
exceptions are grantor trusts and revocable trusts that
elect to be part of a decedent’s estate).
b. Incorrect. A decedent’s estate can use a fiscal year.
c. Incorrect. A bankruptcy estate can use a fiscal year.
3. a. Incorrect. Line 1 of the Other Information section
requires the entity to enter the dollar amount of any
tax-exempt income received.
b. Incorrect. Line 3 of the Other Information section
requires the fiduciary to answer whether the entity has an
interest in or signature or other authority over a foreign
bank account, foreign securities, or other foreign accounts
during the calendar year.
c. Correct. The date the entity was created is not en-
tered in the Other Information section but on line D
at the top of the return.
4. True. Correct. Line 8 of the Other Information
section requires an explanation as to why the estate
is still open after two years.
False. Incorrect. Even though the IRS will not issue an
advance ruling as to whether the estate has been open for
an unreasonably long period, the fiduciary must attach
a statement to the Form 1041 explaining why the estate
has been open for more than two years.
5. True. Correct. Line 3 of the Other Information sec-
tion requires the fiduciary to indicate whether the estate
or trust has any interest in a foreign bank account.
False. Incorrect. The fiduciary may not ignore this
question.
1041_Prep_Book_10.indb 103
ANSWERS TO STUDY QUESTIONS — CHAPTER 4 103
6. a. Incorrect. The type of entity is entered on line A
on the top of page 1 of Form 1041.
b. Incorrect. The number of Schedule K-1s attached is
entered on line B of the top of page 1 of Form 1041.
c. Correct. Whether there are any present or future
trust beneficiaries skip persons is entered on line 9
of the Other Information section.
CHAPTER 4 — Fiduciary Accounting
1. a. Correct. There is a no special IRS form used to
figure fiduciary accounting income.
b. Incorrect. One of the purposes of fiduciary account-
ing is the computation of the distribution deduction.
c. Incorrect. Form 1041 contains a separate Schedule B
that must be used by complex trusts to figure fiduciary
accounting income.
2. a. Incorrect. Although a number of states have now
adopted the latest version of the Act, many states still
rely on the former version of the law.
b. Correct. The UPAIA does authorize the trustee to
distribute a fair share to the income beneficiary.
c. Incorrect. Under the UPAIA, net income from rental
real estate is considered to be income and not principal.
3. True. Correct. The latest version of the UPAIA
gives a trustee this discretion (if state law adopts
such a provision), provided that the beneficiaries of
the trust have no objection and certain other condi-
tions are met.
False. Incorrect. The latest version of the UPAIA gives
the trustee this discretion.
4. a. Incorrect. 2 percent is not reasonable because it is
outside the IRS’ acceptable range.
b. Correct. 4 percent is reasonable because it falls
within the IRS’ acceptable range of no less than 3
percent and no more than 5 percent.
c. Incorrect. 6 percent is not reasonable because it is
outside the IRS’ acceptable range.
5. a. Incorrect. The trustee’s discretion is not the
primary authority.
b. Incorrect. While state law is the secondary guide to allo-
cating income and principal, it is not the primary guide.
c. Correct. The governing instrument is the primary
guide to allocating income and principal.
10/19/2009 10:14:06 AM
 104 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E

6. a. Correct. Deductions allocated to the fiduciary

are reported on page 1 of Form 1041.
b. Incorrect. Deductions allocated to the beneficiary
are taken into account on Schedule B (relating to the
calculation of distributable net income or DNI).
c. Incorrect. Deductions allocated to the beneficiary are
taken into account on Schedule K-1.

7. a. Incorrect. Losses from a trade or business are al-

located to principal.
b. Incorrect. Casualty losses are allocated to principal.
c. Correct. Fiduciary fees may be partially allocated
to principal but typically are allocated partially to
income as well.

8. a. Correct. Only state income taxes and business

expenses allocable to tax-exempt income are deduct-
ible.
b. Incorrect. For fiduciary accounting, expenses directly
related to this income are allocated solely to this income.
c. Incorrect. For fiduciary accounting, expenses indirectly
related to this income are apportioned to this income.

1041_Prep_Book_10.indb 104 10/19/2009 10:14:06 AM

 CASE STUDY
Filled in Form 1041: Explanation
FILING REQUIREMENTS
Most fiduciaries of estates and trusts are required to use
Form 1041. However, a fiduciary of a nonresident alien
estate or foreign trust must file Form 1040NR, U.S.
Nonresident Alien Income Tax Return.
A trustee of a taxable domestic trust must file Form 1041
if one of the following applies:
The trust has $600 or more in gross income.
The trust has taxable income in any amount.
The trust has a beneficiary who is a nonresident alien.
Most trusts are required to file on the basis of a calendar
year. Thus, a trustee must file the return by the 15th
day of the fourth month of the year. However, if the fil-
ing date is a Saturday or Sunday or a legal holiday, the
return must be filed on the next business day. For the
2009 Form 1041, the due date is April 15, 2010. Fiscal
years may be used by:
Trusts that are tax exempt under Code Sec. 501(a)
Charitable trusts under Code Sec. 4947(a)(1)
Trusts that are treated as wholly owned by a grantor
under Code Secs. 671–679
Trusts that are treated as part of the decedent’s estate
under Code Sec. 645
As an alternative to filing Form 1041, trustees of certain
grantor trusts are provided with three optional filing
methods. These methods are described in the Form
1041 instructions.
An administrator or executor for a decedent’s estate is required
to file a return if the estate has gross income of $600 or
more during the year or the estate has a beneficiary who is a
nonresident alien. Decedents’ estates may elect to use either
a calendar year or a fiscal tax year beginning on the date that
the decedent died. If the latter option is chosen, the due date
for the return is generally the 15th day of the 4th month
following the close of the tax year. Thus, if an estate has a tax
year that ends on May 31, 2010, the return must be filed by
September 15, 2010.
For the estates of decedents dying after August 5, 1997,
the executor of the estate and the trustee of a qualified
1041_Prep_Book_10.indb 109
revocable trust can elect to treat the trust as part of the
estate instead of filing a separate Form 1041 (Code Sec.
645). A qualified revocable trust is one that, because of
a power held by the grantor, is treated as owned by the
decedent whose estate is making the election. The elec-
tion to treat the trust as part of the estate must be made
by the due date (including extensions) of the estate’s
Form 1041 for its first tax year and is irrevocable.
A fiduciary for an estate of an individual that is involved
in a bankruptcy proceeding under chapter 7 or 11 of the
Bankruptcy Code should file a Form 1041 as a transmit-
tal document with the related Form 1040. A return for
2009 is due if the bankruptcy estate has gross income
of $9,350 or more.
Fiduciaries, including bankruptcy trustees, may be re-
quired to file various additional documents, such as Form
56 (notice concerning fiduciary relationship),
Form 7004 (extension of time to file fiduciary return for
an estate), Form 706 or Form 706-NA (estate tax returns),
Form 706-GS(D) (return for generation-skipping transfer
tax for distributions), Form 706-GS(D-1) (notification
of distribution from generation-skipping trust), Form
706-GS(T) (return for trust terminations subject to
generation-skipping transfer tax),
Form 720 (quarterly excise tax return), Form 940 (em-
ployer’s FUTA tax return), Form 941 (employer’s quarterly
federal tax return), Form 945 (withheld federal income
tax), Form 1041-ES (estimated tax payments), Form
1041-A (trust accumulations of charitable amounts),
Form 1041-T (allocation of estimated tax payments to
beneficiaries), Forms 1042 and 1042-S (U.S. source in-
come of foreign persons), and Forms 1099-A, -B, -INT,
-LTC, -MISC, -MSA, -OID, -R, and -S (various benefi-
ciary information returns).
The use of the 1099 forms, however, is not necessary
where they would merely duplicate income information
that is otherwise required to be reported on Schedule
K-1. Forms 8275 and 8275-R are disclosure statements,
filed to avoid parts of the accuracy-related penalty and
preparer penalties. Forms 8288 and 8288-A are used
with regard to dispositions by foreign persons of U.S.
10/19/2009 10:14:07 AM
 110 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
real property interests. Form 8300 is used to disclose a
trade or business’ receipt of cash payments of more than
$10,000. Unless requested to do so by the IRS, fiduciaries
are not required to attach copies of trust instruments or
wills to Form 1041.
Fiduciaries are required to indicate the number of Sched-
ules K-1 attached to Form 1041 in Item B on page 1
of Form 1041.
Fiduciaries that would like to take part in the electronic/
magnetic media filing program should file Form 9041,
Application for Electronic/Magnetic Media Filing of Busi-
ness and Employee Benefit Plan Returns, unless they par-
ticipated in the program last year and there have been
no changes in the firm’s name, employer identification
number, mailing address, and contact person’s phone
and FAX number. Form 8453-F, U.S. Estate or Trust
Income Tax Declaration and Signature for Electronic and
Magnetic Media Filing, is the signature document that
completes the filing of Form 1041 on electronic or
magnetic media.
TAX PAYMENTS
A trust is required to make estimated tax payments starting
with its first tax year. However, an estate (or a grantor trust
receiving the residue of a decedent’s estate) is required to
make estimated tax payments starting with any tax year that
ends two or more years after the date of a decedent’s death.
Generally, an estate or trust will have to pay the estimated tax
if it expects to owe, after subtracting withholding and credits,
at least $1,000 in tax for the current tax year and it expects
the withholding and credits to be less than the smaller of
either (1) 90 percent of the tax shown on the current year’s
tax return or (2) 100 percent of the tax shown on the tax
return for the preceding year’s tax return (110 percent if
adjusted gross income on the preceding year’s return is more
than $150,000 and less than two-thirds of gross income is
from farming or fishing (Code Sec. 6654)).
PITFALL: Trusts and estates do not qualify for the
2009 special estimated tax safe harbor that can be
used by certain small business owners.
If the estate or trust did not file a return in the preceding
year or the preceding year’s return did not cover a full 12
months, item (2) above does not apply. Form 1041-ES
may be used to compute the required estimated tax pay-
ments. If there has been an underpayment of estimated
taxes, the fiduciary should file a Form 2210 and report
any penalty for underpayment of estimated taxes on
Line 26, Form 1041.
1041_Prep_Book_10.indb 110
Allocation of Estimated Taxes to Beneficiaries
A trustee or executor may elect to allocate any portion
of the estimated tax payments to any beneficiary. The al-
location election is available for an estate only for its final
tax year. The fiduciary makes the election by complet-
ing and filing Form 1041-T and completing Line 14 of
Schedule K-1 for each beneficiary to whom the estimated
tax payments are allocated. A trust’s or estate’s election
must be filed on or before the 65th day after the close of
its tax year otherwise it will be considered invalid (Code
Sec. 643(g)). For calendar tax year 2009, Form 1041-T
must be filed on or before March 5, 2010. Form 1041-T
should be attached to Form 1041 only if the election is
made before the Form 1041 is filed. Otherwise, Form
1041-T is signed and filed separately.
TRUST EXAMPLES
The amounts and computations appearing in the filled
in Form 1041 are based on an assumed factual situa-
tion, designed to illustrate the preparation of a return
for a complex testamentary trust. For purposes of this
return, it is assumed that John Tyler, who died in 1988,
created by his will a trust (“John Tyler Trust”) that had
the following provisions:
An amount equal to two thirds of the income is to be
currently distributed to a niece, Ms. Mary S. Warden,
and a nephew, Mr. Harold Draper, in equal parts, for
the duration of their respective lives.
The balance of the annual income is to be ac-
cumulated and added to the corpus, which upon
the death of both beneficiaries goes to designated
remaindermen. (None of the remaindermen is a
charitable organization.)
The income is to be distributed as above after deduction
for any expenses, including depreciation, of the trust.
INCOME WHICH IS TAXED TO
AN ESTATE OR COMPLEX TRUST
Accumulations and Other Special Types of Income
The gross income of an estate or trust includes:
Income accumulated in trust for the benefit of unborn
or unascertained persons or persons with contingent
interests, and income accumulated or held for future
distribution under the terms of the will or trust.
Income that is to be distributed currently by the fidu-
ciary to the beneficiaries, and income collected by a
guardian of an infant that is to be held or distributed
as the court may direct.
10/19/2009 10:14:07 AM

Income received by estates of deceased persons during the
period of administration or settlement of the estate.
Income that, in the discretion of the fiduciary, may
either be distributed to the beneficiaries or be accumu-
lated (Code Sec. 641(a)).
Income in the first category is taxed to the estate or trust;
income in the second category that is currently distributable
(not in excess of distributable net income) is deductible by
the fiduciary and taxed to the beneficiary; income in the
third and fourth categories may be eventually taxed to the
fiduciary or to the beneficiary, depending upon the amounts
that are properly paid or credited to the beneficiary. How-
ever, all taxable income that passes through the hands of an
estate or trust is includible in its gross income.
Page 1: Income and Deductions
The income shown on page 1 of Form 1041 on Lines 1–8
and the deductions on Lines 10–15b are entered as if the
entire net income were taxable to the trust. From the net
income of the trust are deducted the amount distributed
or required to be distributed to the beneficiaries (Line 18),
certain estate or generation-skipping taxes (Line 19), and the
appropriate exemption (Line 20). The remainder (Line 22)
is the taxable income on which the fiduciary pays the tax.
In order to deduct administrative expenses or selling
expenses incurred when disposing of property from a
decedent’s estate or casualty and theft losses incurred
during the settlement of the estate, a statement must be
filed indicating an election to waive the right to deduct
those items on Form 706 for estate tax purposes.
Income and Expenses in Respect of a Decedent
Items of income to which a decedent was entitled, but
that were not includible in computing the decedent’s
taxable income for the tax year ending with the date of
death, or for a previous tax year under the decedent’s
method of accounting, are includible in the gross
income of the estate, trust or person receiving them
as “income in respect of a decedent.”
Similarly, deductions for business expenses, interest,
state and local income and real estate taxes, investment
expenses, and percentage depletion and foreign tax credits
that were not allowable on the decedent’s final return gen-
erally are allowed to the estate in the tax year in which the
underlying expense is paid (Code Sec. 691(a) and (b)).
INTEREST INCOME
The $5,000 reported on Line 1, page 1, of the filled in
Form 1041 represents taxable interest that was received
1041_Prep_Book_10.indb 111
CASE STUDY 111
by the trust from bank deposits, mortgage notes, cor-
poration bonds, and government obligations, and as a
regular interest holder in a real estate mortgage invest-
ment conduit (REMIC).
INTEREST ON GOVERNMENT OBLIGATIONS
Many obligations of a state or political subdivision are
exempt from tax. But interest on such securities (as ad-
justed) must be excluded from the distributions deduc-
tion on Line 18, page 1 (as computed on Schedule B, page
2, of Form 1041). Taxable interest on U.S. government
obligations is included on Line 1, page 1, Form 1041.
DIVIDENDS
The total amount of taxable dividends is entered on Line
2a, page 1. The beneficiary’s allocable share of qualified
dividends is entered on line 2b(1), and the trust’s or es-
tate’s share is entered on line 2b(2). Qualified dividends
are eligible for a lower tax rate than other ordinary in-
come, and are generally dividends reported to the estate
or trust in box 1b of Form 1099-DIV. For exceptions,
see page 14 of the 1041 instructions. Dividends in the
John Tyler Trust are not allocable to corpus. Therefore,
the dividends are apportioned between the trustee and
beneficiaries. Each beneficiary’s share is shown on Line
2 of a separate Schedule K-1.
BUSINESS PROFIT OR LOSS
If an estate or a trust was engaged in a trade or business
or in farming during the tax year, the net profit (or loss)
from the business is entered on Line 3, page 1, Form 1041,
and the net profit (or loss) from the farming is entered on
Line 6, page 1, Form 1041. The net income from such
enterprises is computed on either Schedule C or C-EZ
(business income) or Schedule F (farming income). These
schedules are the same schedules used by an individual to
complete a Form 1040. However, only the estate’s or trust’s
share of the depreciation is deducted on the schedules.
INCOME FROM RENTS, ROYALTIES,
AND FLOW-THROUGH ENTITIES
The estate’s or trust’s share of income or losses from rent-
als of real estate, royalties, partnerships, S corporations,
other estates and trusts, and REMICs (attributable to a
residual interest in the REMIC) is reported on Schedule
E (Form 1040), and the net profit or loss is entered on
Line 5, page 1, of Form 1041.
Items for which a determination must be made at the in-
dividual partner or shareholder level (interest, dividends,
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 112 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
capital gains or losses) that are contained in a Schedule
K-1 received from a flow-through entity are reported on
the corresponding line of Form 1041. Losses attributable
to passive activities may be disallowed.
On Schedule E, Form 1040 (not included), the John
Tyler Trust reported receiving $45,000 in total rents from
an apartment building. The trust’s expenses amounted
to $19,529, including: repairs, $2,950; heating costs,
$10,000; insurance premiums, $2,050; janitor costs,
$1,300; and real estate taxes, $3,229. There is no depreci-
ation expense as the building has been fully depreciated.
Net rental income of $25,471 from Line 26, Schedule
E, is reported on Line 5, page 1, of Form 1041.
DEPRECIATION
The estate’s or trust’s share of depreciation, amorti-
zation, or depletion expenses attributable to certain
activities is reported on Schedule C, C-EZ, E, or F of
Form 1040. The net profit or loss amounts from the
schedules are reported on Line 3, 5, or 6 of Form 1041.
Line 15a of Form 1041 is used to report depreciation,
amortization, and depletion expenses unrelated to a
specific business or activity. In the case of a trust, these
deductions are apportioned between the fiduciary and
the beneficiaries as specified in the trust instrument. If
the trust instrument is silent on this point, the deduc-
tions are apportioned between the fiduciary and the
beneficiaries in the same manner that income is divided
between them. In the case of an estate, the deductions
for amortization, depreciation, and depletion are ap-
portioned between the estate and the beneficiaries in
the same way.
Form 4562 is filed only if depreciable property is placed
in service during the year, if depreciation is claimed on
listed property, or if amortization of costs begins dur-
ing the year. In this case, the property has been fully
depreciated, so there is no deduction to be allocated
to the beneficiaries.
An estate or trust may not elect to expense property under
Code Sec. 179. The 50 percent first-year bonus deprecia-
tion deduction is allowed. Depreciation or amortization
deductions are not allowed for any term interest in property
held directly or indirectly by a related person (as defined in
Code Sec. 267(b) or (e)) (Code Sec. 167(e)). In tax years
beginning after August 5, 1997, the executor and benefi-
ciary of an estate are considered related persons, except in
the case of a sale or exchange in satisfaction of a pecuniary
bequest (Code Sec. 267(b)(13)).
1041_Prep_Book_10.indb 112
Generally, the basis of property must be reduced by the
disallowed depreciation or amortization deduction, and
the basis of the remainder interest must be increased by
such amount. The disallowance does not apply to hold-
ers of life estates or terminable interests (as described in
Code Sec. 273).
AT-RISK AND PASSIVE
ACTIVITY LOSS LIMITATIONS
An estate or trust may be subject to the at-risk and the
passive activity loss limitations. If an estate or trust is
subject to both loss limitation rules, the at-risk rules
apply before the passive activity rules.
At-Risk Limitations on Losses
The at-risk rules of Code Sec. 465 apply to estates and
trusts engaged in any activity carried out as a trade or
business or for the production of income. The deductible
loss is limited to the amount at risk in the activity.
When applying the at-risk rules, each of the following
items is treated as a separate activity:
Motion picture and video tape holding, producing,
and distribution
Personal property leasing
Farming
Exploring for, or exploiting, oil and gas properties
Exploring for or exploiting, geothermal properties
All other activities can be treated as a single activity if the
fiduciary is an active participant in the enterprise. The
at-risk adjustment of a loss is made on Schedules C, E, or
F of Form 1040 and will be reflected in the net income or
loss entered on Line 3, 5, or 6 of Form 1041. If an estate
or trust has a loss from a business, rental of real estate,
or a farm and is not at risk with regard to some related
amounts, the fiduciary must attach Form 6198.
Passive Activity Loss and Credit Limitations
Losses derived from passive activities are limited to the
amount of income derived from all passive activities
conducted by the estate or the trust (Code Sec. 469).
Similarly, tax credits from passive activities are limited to
the tax liability generated by the passive activities. These
limitations are first applied at the estate or trust level.
Generally, a passive activity is one that involves the
conduct of a trade or business in which the taxpayer
does not materially participate. While rental activities
are generally considered passive activities, rental real
10/19/2009 10:14:08 AM

estate activities are not subject to passive loss limita-
tions for certain taxpayers who materially participate
in real property trades and businesses (Code Sec.
469(c)(7)). In the case of a grantor trust, material
participation is determined by reference to the ac-
tivities conducted by the grantor. The IRS has taken
the position that only the activities of the fiduciary
are to be taken into account for determining what
constitutes material participation for an estate or
nongrantor trust (TAM 200733023).
Portfolio income received by an estate or trust (interest,
dividends, royalties, annuity income (Code Sec. 469(e))
is not treated as income derived from a passive activity.
Similarly, income derived from a working interest in oil
and gas property is not income from a passive activity
(Code Sec. 469(c)(3)).
An estate can deduct up to $25,000 in rental real
estate activity expenses incurred in tax years ending
within two years after the decedent’s death, provided
that the decedent actively participated in the activity
(Code Sec. 469(i)(4)). Any unused losses or credits
are suspended and are carried forward indefinitely.
Also, if an estate or trust distributes an interest in a
passive activity, the basis of the property immediately
before the distribution is increased by passive losses
allocable to the interest. The amount of such losses is
not deductible by the distributing estate or trust (Code
Sec. 469(j)(12)).
The amount of an allowable passive activity loss is com-
puted on Form 8582, Passive Activity Loss Limitations.
The amount of an allowable credit is computed on Form
8582-CR, Passive Activity Credit Limitations. Form 8582
should be completed first so that the deductible amount
of net loss from real estate can be determined on Sched-
ule E of Form 1040, the amount of a loss reported on
Schedule C or F of Form 1040 can be determined, and
the amount of a loss from a partnership or other fiduciary
can be determined on Schedule E.
CAPITAL GAINS AND LOSSES
Gains and losses from the sale or exchange of capital
assets are computed on Parts I and II of Schedule D,
Form 1041 and allocated between the fiduciary and
the beneficiaries on Part III of Schedule D, Form 1041.
Capital assets are defined on page 31 of the instructions
for Form 1041.
The maximum long-term capital gain tax rate is gener-
ally zero percent for estates and trusts that would be
taxed at the 15 percent rate on ordinary income and
1041_Prep_Book_10.indb 113
CASE STUDY 113
15 percent for estates and trusts that are subject to an
ordinary income tax rate in excess of 15 percent.
A 25 percent rate applies to unrecaptured section 1250
gain (i.e., unrecaptured depreciation) from the sale,
exchange, etc., of depreciable real estate if the property
was held for more than one year. Unrecaptured section
1250 gain is computed on a worksheet provided on page
34 of the Form 1041 instructions.
A 28 percent rate applies to long-term collectibles gain
and the amount of gain equal to the exclusion claimed
for qualified small business stock under Code Sec.
1202. (50 percent of qualified small business stock gain
is exempt from tax; the remaining gain is treated as 28
percent rate gain.)
Property acquired by a decedent’s estate from a de-
cedent is considered held for more than 12 months
(Code Sec. 1223(10)).
The short and long-term carryover amounts entered on
Lines 4 and 11 are determined using the capital loss carry-
over worksheet contained in the Form 1041 instructions.
Part III of Schedule D is used to show the allocation of
the net short term capital gain or loss reported on Line
5 and the net long-term capital gain or loss reported on
Line 12 between the estate or trust and the beneficiaries
as a group. The amount allocated to each beneficiary is
shown on each beneficiary’s Schedule K-1.
The beneficiaries’ share of net short-term capital gain
or loss is reported on Line 13, column 1, Part III.
The estate or trust’s share is reported in column 2.
Net long-term capital gain is allocated between the
beneficiaries and estate or trust on Line 14a, columns
1 and 2, respectively. The transactions resulting in
unrecaptured section 1250 gain and the 28 percent
rate gain are identified separately on Lines 14(b) and
14(c), respectively. Each beneficiary’s share of net
capital gain is reported on Schedule K-1 as follows: net
short-term capital gains, Line 3; total net long-term
capital gains, Line 4a; long-term capital gain subject to
the 28 percent rate, Line 4b; and unrecaptured section
1250 gain, Line 4c.
Capital gain may only be allocated to beneficiaries to the
extent that it is considered as paid, credited, or required
to be distributed to any beneficiary during the tax year
(Reg. §1.643(a)-3(a)). Similarly, capital losses are taken
into account only to the extent that they enter into the
determination of any capital gains that are paid, credited,
or required to be distributed to any beneficiary during
the tax year (Reg. §1.643(a)-3(b)).
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 114 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
Generally, capital gain is considered paid, credited, or
required to be distributed to a beneficiary only if it is:
Allocated to income under the terms of the governing
instrument or local law.
Allocated to corpus and actually distributed to
beneficiaries.
Utilized (pursuant to the terms of the governing instru-
ment or the practice followed by the fiduciary) in deter-
mining the amount distributed or required to be distrib-
uted to the beneficiaries (Reg. §1.643(a)(3)-3(b)).
Any capital gain paid or permanently set aside for
a charitable purpose specified in Code Sec. 642(c)
must be allocated to the estate or trust in column 2
(Reg. §1.643(a)-3).
Except for the year in which an estate or trust terminates,
if there is a net short-term capital loss from the sale or
exchange of capital assets on Line 5, the entire net loss
must be allocated to the estate or trust (Reg. §1.642(h)-1).
Similarly, a net long-term capital loss on Line 12 of sched-
ule D must be allocated entirely to the estate or trust.
Part IV is completed to determine the capital loss limita-
tion (the smaller of the loss reported on Line 15, column
(3) or $3,000) if a total net loss is reported on Line 15,
column (3). If the Line 15, column (3) loss is greater
than $3,000 (or a negative taxable income (net operating
loss) is reported on Line 22 of Form 1041) the capital
loss carryover worksheet contained in the instructions
should be completed.
In the final year of a trust or decedent’s estate, short-term
and long-term capital loss carryovers may be claimed by
the beneficiaries on Schedule K-1, Line 11.
Part V of Schedule D applies the appropriate tax rates to
net long-term gain reported elsewhere on the schedule.
A short-term or long-term capital loss carryover is re-
ported on Line 4 or 11 of Schedule D, respectively.
For the illustrative Form 1041, the sale of stock that pro-
duced long-term capital gain took place on May 1. The
governing trust instrument is silent on the treatment of
gains from the sales of corpus. Under most state laws, such
gains are not distributable to the life beneficiaries, but are
added to, and become a part of, the corpus held for the
remaindermen unless the trust instrument directs other-
wise. Accordingly, no part of this gain in the filled in form
is included in Lines 3 and 4a–4c of separate Schedule K-1.
It remains as capital gain income, taxable to the trust. The
trust’s gain of $16,200 on Line 15 column (2), Schedule
D, is entered on Line 4, page 1, Form 1041.
1041_Prep_Book_10.indb 114
An estate or trust that incurs a net capital loss must com-
plete Part IV of Schedule D to compute its capital loss
limitation. A worksheet is provided in the Form 1041
instructions to determine any capital loss carryover.
Gain from the disposition or involuntary conversion of
property subject to recapture under Sec. 1245, 1250,
1252, 1254, or 1255 is entered in Part III, Form 4797
Sales of Business Property. Any ordinary income from the
recapture is carried to Part II, Form 4797. Code Sec.
1231 transactions are reported in Part I of Form 4797,
including gains from installment sales and casualties. If
the Sec. 1231 items result in a net gain on Part I, the net
gain is carried to Line 10, Part II, Schedule D of Form
1041, and is treated as a long-term capital gain. If a net
Sec. 1231 loss results, it is entered in Part II, Form 4797,
and combined with other ordinary gain or loss items. The
net ordinary gain or loss on Line 18, Part II, Form 4797,
is transferred to Line 7, page 1, of Form 1041. A Sec.
1231 gain from a casualty or theft of recapture property
is transferred from Line 32, Part III, Form 4797, to Line
33, Part II, Section B, Form 4684.
Casualty or Theft Gain or Loss
Gains and losses from casualties and thefts of property
are reported item-by-item on Form 4684 Casualties
and Thefts in either Section A (for property not used in
a trade or business or for income-producing purposes)
or Section B (for property used in a trade or business or
for income-producing purposes). Non-business losses
are deductible only to the extent that the total amount
of such losses, after a $100 reduction for each casualty
or theft, exceeds 10 percent of a taxpayer’s adjusted
gross income.
Casualty and theft losses are allowable to an estate only if
the loss has not been claimed as a deduction from the gross
estate of the decedent in a federal estate tax return.
Section B, Part II, of Form 4684, which deals with prop-
erty used in a trade or business or for income-producing
purposes, separates casualty and theft gains and losses
into two general types. The first involves such gains and
losses on short-term property. Net gains of this type are
taxed as ordinary income, and net losses are treated as
ordinary losses. The second type involves such gains and
losses on long-term property. Net gains from this type of
property qualify for Sec. 1231 (capital gain) treatment,
and net losses are treated as ordinary losses. The gains
and losses reported on Form 4684 may be reported
directly on page 1 of Form 1041 and on Schedule D of
Form 1041, or on Form 4797 in accordance with the
following rules.
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Casualty or theft of property held short term (Form
4684, Section B, Part II, Lines 29–32). Short-term
casualty and theft gains and losses are separated into:
Losses involving trade, business, rental or royalty
property (column (b)(i))
Losses involving income-producing property
(column (b)(ii))
Gains from casualties and thefts includible in
income (column (c))
The net gain or loss from combining columns (b)(i) and
(c) of Line 30 is an ordinary gain or loss and is transferred
to Line 14, Part II, Form 4797. However, if Form 4797
does not otherwise have to be filed, the net gain or loss is
reported on Line 7, page 1, Form 1041, with the notation
“Form 4684.” Total losses from other property (column
(b)(ii), Line 30) are entered on Line 32 of Form 4684
and are then deducted as “other deductions” on Line
15a, page 1, Form 1041.
Casualty or theft of property held long term (Form
4684, Section B, Part II, Lines 33–39). In Part II,
long-term casualty and theft gains and losses are also
categorized into losses involving trade or business, etc.,
property, losses from income-producing property, and
gains from casualties or thefts includible in income.
The gain from recapture property from Form 4797 is
reflected in the computation. A net loss from Line 38a
is transferred to Line 14, Part II, Form 4797, where it
becomes part of the ordinary gain and loss computa-
tion. If Form 4797 does not otherwise have to be filed,
the net loss from Line 38a is reported on Line 7, page
1, Form 1041, with the notation “Form 4684.” In ad-
dition, total losses from income-producing property
(Line 35, Form 4684, column (b)(ii)) are entered on
Line 38b and then are deducted on Line 15a, page 1,
Form 1041. However, if the netting of total gains on
Line 36 against the total losses on Line 37 produces
a net gain, the net gain is reported on Line 39 and
is treated as a capital gain. The net gain, as reported
on Line 39, is carried to Line 3, Part I, Form 4797,
where it becomes part of the capital gain-ordinary
loss computation.
The John Tyler Trust did not have any dispositions of
assets that required the filing of Form 4684 or 4797.
OTHER INCOME
If an estate or trust has other income not provided for
on Lines 1 through 7 on page 1 of Form 1041, the type
and amount of such income should be entered on Line
8, page 1. This includes wages received as income in
1041_Prep_Book_10.indb 115
CASE STUDY 115
respect of a decedent; and any portion of a lump-sum
distribution from a qualified employee benefit plan that
is taxable as ordinary income.
DEDUCTIONS
An estate or trust can claim two general classes of de-
ductions. The first class includes deductions from total
income reported on Line 9 to arrive at the adjusted total
income amount reported on Line 17, Form 1041. These
deductions include: interest expenses (Line 10), taxes
(Line 11), fiduciary fees (Line 12), charitable contribu-
tions (Line 13), fees paid to attorneys, accountants, and
return preparers (Line 14), other deductions that are not
subject to the 2 percent floor (Line 15a), and those that
are subject to the 2 percent floor (Line 15b). The sum
of Lines 10 through 15b is entered on Line 16.
If an estate or trust has tax-exempt income, the deduction
amounts claimed on Lines 10 through 15b must be reduced
by an allocable portion attributable to tax-exempt income.
This is done by multiplying the amount of each deduction
by a percentage factor that is derived by dividing the total
tax-exempt income by gross income (including tax-exempt
income) included in distributable net income.
The second general class of deductions is reported on
Lines 18 through 20. It includes the income distribution
deduction (Line 18), the estate tax deduction (Line 19),
and the exemption (Line 20).
INTEREST AND TAXES
All interest paid or accrued during the tax year, except
interest deducted elsewhere on the return, is entered on
Line 10. The types of interest that are deductible on Line
10 (subject to limitations) include:
Investment interest
Qualified residence interest
Interest on the estate tax that is deferred or paid in
installments under Code Sec. 6601
Interest on a debt that was incurred or continued in order
to buy or carry tax-exempt obligations is not deductible.
Interest on debts incurred in connection with business
activities (including rental activities) is deducted on
Schedule C, C-EZ, E or F of Form 1040 rather than on
Line 10 of Form 1041.
Qualified residence interest includes interest incurred
by an estate or trust on debt secured by the qualified
residence of a beneficiary. A deduction may be claimed
only if the beneficiary has a present or residuary interest
in the estate or trust.
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 116 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
The deduction for investment interest is limited to net
investment income for the tax year and is computed on
Form 4952. The box on Line 10 must be checked.
Taxes
On Line 11, the fiduciary deducts all deductible taxes
that have not been deducted elsewhere on Form 1041.
Deductible taxes include state and local income or real
property taxes and the generation-skipping tax imposed
on income distributions.
FIDUCIARY, ACCOUNTANT, ATTORNEY,
AND RETURN PREPARER FEES
The total amount of deductible fees paid to the fiduciary
for administering the estate or trust should be entered on
Line 12, Form 1041. Other deductible fees paid to the at-
torneys, accountants, and/or return preparers of the estate
or trust should be entered on Line 14. Some deductions
of an estate or trust are subject to a 2 percent floor on ad-
justed gross income. For purposes of the John Tyler Trust,
it is assumed that the expenses are costs paid or incurred in
the administration of an estate or trust that would not have
been so paid had the property not been held in trust.
CHARITABLE DEDUCTION
Estates and complex trusts may claim a charitable deduc-
tion, which is first computed on Schedule A, Line 7,
and then entered on Line 13, page 1, of Form 1041. A
charitable deduction may be claimed only if the contri-
bution is provided for in the governing instrument and
the contribution is made from the gross income of the
estate or trust. In the case of an estate, the deduction is
available for actual payments made during a year and for
amounts permanently set aside for a charity. However,
trusts (other than certain pre-1969 trusts) may claim a
deduction only for cash payments to a charity. An elec-
tion is available whereby a fiduciary can treat payouts
made up to the end of the following tax year as having
been paid in the prior year for deduction purposes. This
election is made by attaching a statement to the return
(or to an amended return) for the tax year in which the
fiduciary chooses to claim the contribution deduction.
Complex trusts claiming a charitable contribution de-
duction must also file Form 1041-A, U.S. Information
Return—Trust Accumulation of Charitable Amounts.
OTHER DEDUCTIONS
Expenses that are not deductible elsewhere are deducted
on either Line 15a or Line 15b of Form 1041. Schedules
itemizing these deductions must also be submitted.
1041_Prep_Book_10.indb 116
Deductions Not Subject to Two Percent of AGI Floor
On Line 15a, the fiduciary deducts miscellaneous ex-
penses that are not subject to the 2%-of-adjusted-gross-
income (AGI) floor and that are not deducted elsewhere.
These expenses include:
Bond premiums that the fiduciary has elected to
amortize
Nonbusiness casualty and theft losses from Form 4684,
provided that an estate tax deduction has not been
claimed and the necessary waiver has been filed
The deduction for clean-fuel vehicles and certain
refueling property
Net operating loss, supported by a statement showing
its computation
The estate’s or trust’s share of amortization, deprecia-
tion, and depletion not claimed elsewhere
Commercial revitalization deductions described in
Code Sec. 1400I
Deductions Subject to Two Percent of AGI Floor
The estate or trust deducts on Line 15b miscellaneous
itemized deductions that are subject to the 2%-of-
AGI floor. This deduction is the excess of the total
amount of miscellaneous itemized expenses over 2
percent of the estate’s or trust’s AGI for the year.
The most common types of deductions subject to
the 2 percent floor are expenses for the production
or collection of income such as investment advisory
fees, safe deposit box rentals, and subscriptions to
investment advisory publications.
An estate or trust has to make a special AGI computa-
tion to apply the above rules. This special AGI amount is
computed by subtracting from total income (Line 9):
The total administration costs as reported on Lines
12, 14, and 15a
The income distribution deduction reported on
Line 18
The estate’s or trust’s exemption reported on Line 20
The net operating loss deduction claimed on Line 15a
The income distribution deduction is computed in dif-
ferent ways depending on whether distributions are less
than or more than distributable net income (DNI). If
the amount of such distributions is less than DNI, the
amount of the actual distributions is used. If the amount
of the distributions is more than DNI, the DNI must
be computed by taking into account the miscellaneous
itemized deductions after applying the 2 percent floor.
An algebraic formula for this computation is provided
in the Form 1041 instructions.
10/19/2009 10:14:08 AM

DISTRIBUTIONS DEDUCTION
An estate or trust claims a deduction from income for
distributions to beneficiaries, and the amount so allowed
is included in the income of the beneficiaries (Code Sec.
661(a)). The distributions deduction claimed on Line
18, page 1, of Form 1041 is computed on Schedule B,
Line 15. (Instead of completing Schedule B, a pooled
income fund attaches a statement showing how the
income distribution deduction was determined.)
Schedules K-1 must be attached for the beneficiaries of an
estate or trust that claims the income distribution deduc-
tion. Also, the distribution deduction must be recomputed
on a minimum tax basis on Schedule I. The deduction
is the total of the amounts paid, credited or required to
be distributed to the beneficiaries, or the distributable
net income, whichever is less. In either case, the amount
must be adjusted to exclude any tax-exempt income (it is
assumed that there is none in the filled in return).
Cemetery Perpetual Care Fund
On Line 18, page 1, of Form 1041, the amount paid for
the maintenance of cemetery property (limited to $5 per
gravesite) may be deducted. The number of gravesites
should be entered to the right of the entry space for Line
18. Also, “(Section 642(i) Trust)” should be written after
the trust’s name at the top of Form 1041. It is not necessary
to complete Schedules B and K-1 for a cemetery perpetual
care fund.
65-Day Election
A trustee of a complex trust can make a yearly irrevocable
election to treat a distribution, or any part of it, made
within the first 65 days of the trust’s tax year as having
been distributed to the beneficiary on the last day of the
trust’s preceding tax year. This 65-day election is also
available to decedents’ estates. The election is made by
checking the box at Item 6 under “Other Information”
on the bottom of page 2 of Form 1041.
The amount of income required to be distributed cur-
rently in the filled in Form 1041, $19,514, is less than
the distributable net income of $29,271. Therefore, the
income distribution deduction is $19,514. This amount
is carried from Line 15, Schedule B, page 2, Form 1041,
to Line 18, page 1.
DISTRIBUTABLE NET INCOME
Before the amount of the deduction for distributions
to beneficiaries, to be entered on Line 18, page 1,
of Form 1041 may be determined, it is necessary to
1041_Prep_Book_10.indb 117
CASE STUDY 117
compute distributable net income. DNI must also be
determined before the separate Schedules K-1 for each
beneficiary’s share of income, deductions, and credits
can be completed.
The distributable net income, which is computed in
Schedule B, page 2, of Form 1041, is the income of the
trust for the current year that is available for distribu-
tion. It includes all tax-exempt interest and all dividends.
(Instead of using Schedule B to compute the income
distribution deduction, pooled income funds attach a
statement showing how the deduction was computed.)
If a single trust has more than one beneficiary with
separate and independent shares of the trust, their shares
are treated as separate trusts in determining distributable
net income allocable to each beneficiary. A similar rule
applies to treat beneficiaries’ substantially separate and
independent shares of the estate of a decedent dying after
August 5, 1997, as separate estates. When the separate
share rule applies, distributable net income allocable to
each beneficiary should be computed on a separate sheet
attached to the return.
In determining distributable net income, if capital gains
are required to be distributed to beneficiaries or if the
trust takes a deduction for a charitable contribution that
is made up in whole or in part of capital gains, the net
capital gain distributable to beneficiaries and the long-
term capital gain and short-term capital gain that are paid
or permanently set aside for charitable, etc., purposes are
to be included. Otherwise, capital gains are excluded.
In the illustrative return, the amount of $45,471 entered
on Line 1 of Schedule B is the trust’s adjusted total income
from Line 17, page 1, of Form 1041. This amount is
computed by taking the trust’s total income on Line 9 of
page 1 and subtracting the trust’s total deductions reported
on Line 16 on page 1. Thus, the distributions deduction
and the deduction for estate taxes attributable to income
in respect of a decedent are disregarded. Adjustments for
items of tax-exempt interest, etc., described above are to
be accounted for on Lines 2 through 6 of Schedule B. In
this illustrative return, since the capital gains are assumed
not to be distributable to the beneficiaries, they are to be
excluded from distributable net income and, accordingly,
are deducted on Line 6 of Schedule B. The deduction of
$16,200 of capital gains leaves a distributable net income
of $29,271, as noted on Line 7, Schedule B. This amount
also is the trust’s accounting (or Code Sec. 643(b)) income,
which is determined under the terms of the governing
instruments and the applicable local law, as reported on
Line 8, Schedule B.
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 118 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
REQUIRED DISTRIBUTIONS —
OTHER DISTRIBUTIONS
The amounts of income of the estate or trust required to be
distributed currently to each beneficiary, whether distributed
or not, and any other amounts paid, credited, or required
to be distributed during the tax year, are to be entered on
Lines 9 and 10 of Schedule B, page 2, Form 1041. In the
illustrative return, no amounts are entered on Line 10 be-
cause the only distribution made by the trust for 2009 was
the required two thirds of current income less expenses.
The $19,514 in the illustrative return, which appears on
Line 9 of Schedule B and constitutes the amount of income
currently distributable to the beneficiaries, is computed
from the amounts appearing on page 1 as follows:
Income:
Line 1: Interest on bank deposits, notes, and
corporation bonds
Line 2: Dividends
Line 5: Net rents
Total
Expense:
Line 11: Taxes
Line 12: Fiduciary fees
Line 14: Return preparer fees
Total
Current income less expenses
Distributable to beneficiaries (2/3 of $29,271)
Since the trust instrument specifies that the beneficiaries
are to share equally in two-thirds of the trust income
after deduction of expenses, one half of the $19,514, or
$9,757, is assigned to Mary S. Warden, and $9,757 is
assigned to Harold Draper.
BENEFICIARIES’ INCOME AND CREDITS
Separate Schedule K-1
Schedule K-1 is used to report a beneficiary’s share of
the income, deductions, and credits from the estate or
trust. Three copies of Schedule K-1 must be prepared
for each beneficiary. One copy of each Schedule K-1 is
filed with Form 1041, another copy is given to the ben-
eficiary, and the third copy is retained by the fiduciary.
The fiduciary must request an identification number
from each beneficiary. Further, the fiduciary is subject
to a $50 penalty under Code Sec. 6723 for failing to
include the identification number on a Schedule K-1,
unless such failure is due to reasonable cause.
1041_Prep_Book_10.indb 118
Income Shares Shown in Schedule K-1
Each beneficiary must include in gross income the
smaller of either the amounts paid, credited or required
to be distributed, or the proportionate share of distribut-
able net income. Either is reduced by the share of dis-
tributable tax-exempt income (decreased by the share of
expenses incurred in earning that income). The character
of the income reported on each separate Schedule K-1 by
the fiduciary should be the same as the items that enter
into the computation of distributable net income.
If the total of the amounts paid, credited or required to
be distributed is more than the amount of distributable
net income shown in Schedule B, then the amounts that
go into the computation of distributable net income are
reported on each Schedule K-1 in proportion to each
beneficiary’s share of income.
$5,000
If the total payments, credits, and required distributions
1,200 are less than the distributable net income, only a propor-
25,471 tionate part of each item entering into the computation
$31,671 of distributable net income is reported on Schedule K-1,
according to the ratio of each particular item of income to
the distributable net income. This is the situation in the
$1,575 case of the illustrative filled in form as explained below.
675
150 If capital gains and losses are involved (see below) or a
$2,400 charitable deduction is claimed, special computations are
required to determine the beneficiaries’ shares of income.
$29,271
$19,514 Allocation of Deductions
Deductible items that enter into the computation
of distributable net income are allocated among
income items in a manner that is not inconsistent
with the passive activity loss limitations under Code
Sec. 469. In determining the amount of each item
of distributable net income, deductions directly
related to a particular class of income are deducted
from that class. Deductions not directly related to
any particular class of income may be deducted
from any class, as long as a reasonable proportion
is deducted from tax-exempt income. If the deduc-
tions allocable to one class of income exceed that
income, the excess may be allocated to other classes
of income. However, excess deductions allocable to
tax-exempt income may not be allocated to other
classes of income. Additionally, excess deductions
from passive activities may not be allocated against
nonpassive activities or portfolio income earned by
an estate or trust. Deductions that enter into the
computation of distributable net income may not be
allocated to corpus items or to income not included
in distributable net income.
10/19/2009 10:14:08 AM

Trust or estate deductions cannot generally be claimed
by the beneficiary. Therefore, no negative amounts may
be shown for any class of income except in the final year
or for amortization, depreciation or depletion.
Capital Gains and Losses
Generally, capital gains are not included in distributable
net income unless they are one of the following:
Allocated to income under the governing instrument
or local law
Allocated to corpus and actually distributed to ben-
eficiaries during the taxable year
Used, under the governing instrument or the practice
followed by the fiduciary, in determining the amount
which is distributed or required to be distributed
Paid or to be used for charitable purposes so that a
contributions deduction is allowed
Capital losses are excluded from the computation of dis-
tributable net income. But if capital gains are distributed,
the capital losses are offset against the gains to determine
the net capital gains distributed.
Credits
Income tax credits are generally allocated between an
estate or a trust and its beneficiaries, based on the divi-
sion of income.
The general business credit limitation based on tax li-
ability generally may not exceed net income tax minus
the greater of the tentative minimum tax or 25 percent of
the net regular tax liability over $25,000. For estates and
trusts, the $25,000 limitation amount must be reduced
to an amount that bears the same ratio to $25,000 as
the portion of the income of the estate or trust that is
not allocated to beneficiaries bears to the total income
of the estate or trust (Code Sec. 38(c)(3)(D)).
Filling in Schedule K-1
In the filled in form, there is no interest or other income
exempt from tax, and no capital gains are distributable.
This leaves only dividends and other taxable income to be
reported on each separate Schedule K-1 (Form 1041).
Total income, exclusive of capital gains, includes divi-
dends of $1,200, interest of $5,000, and net rental in-
come of $25,471. Assuming they are not directly related
to any income item, the following expenses are to be
allocated in the fiduciary’s discretion:
1041_Prep_Book_10.indb 119
CASE STUDY 119
Personal property tax $1,575
Trustee fees 675
Fee for preparing income tax return 150
Total $2,400
In this filled in return, the fiduciary elects to reduce the
rental income by these deductions. This leaves taxable
dividends of $1,200, interest of $5,000, and rental in-
come of $23,071 (net rents of $25,471 minus $2,400).
Because the total amount distributed, $19,514, is less
than the distributable net income, $29,271, only pro-
portionate parts of the dividends and the other taxable
income are reported on each separate Schedule K-1.
The dividends allocable to the beneficiaries are deter-
mined by multiplying the gross dividends of $1,200 by
a fraction with the actual amount distributed ($19,514)
as the numerator and the distributable net income
($29,271) as the denominator. The result is $800 al-
locable to the beneficiaries, $400 to each.
Similarly, this fraction is applied to the interest and
rental income to arrive at interest of $3,333 applicable
to the beneficiaries, $1,667 to each, and rental income
of $15,380, $7,690 to each.
On Schedule K-1 (Form 1041) for Mary S. Warden,
interest of $1,667 is reported on Line 1 and qualifying
dividends of $400 are reported on Line 2b. A similar
Schedule K-1 would be prepared for Harold Draper
(not reproduced).
Net short-term capital gains and net long-term capital
gains are reported on Lines 3 and 4a–c, respectively, of
Schedule K-1. Total net long-term capital gain for the
year is reported on Line 4a, unrecaptured section 1250
gain is reported on Line 4c, and net long-term capital
gain subject to the 28 percent capital gains rate (collect-
ible gains and the nonexcludible gain from the sale of
qualified small business stock) is reported on Line 4b.
For a beneficiary other than a corporation, the benefi-
ciary’s allocable share of a capital loss carryover upon
termination of the estate or trust is entered as a loss in
parentheses on Line 11.
On Line 5, the beneficiary’s share of annuities, royalties
or any other income that is not subject to any of the pas-
sive activity loss limitations is reported. Line 8 is used to
report income items that could be subject to the passive
activity rules at the beneficiary’s level, such as rental and
rental real estate income.
10/19/2009 10:14:08 AM
 120 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
Rental income from real estate activities of $7,690 is
reported on Line 7 of the filled-in return. To assist the
beneficiary in computing any applicable passive activity
loss limitations, a separate schedule should be attached
showing the beneficiary’s share of income derived from
rental real estate, other rental, trade or business activi-
ties.
On Line 9, the beneficiary’s shares of depreciation,
depletion, and amortization are reported. There are no
allocations of depreciation, depletion, or amortization on
the filled in Schedule K-1, as the building has been fully
depreciated. Any adjustments or tax preferences attribut-
able to these three items are reported on Line 12.
The allocable portion of an estate tax deduction is re-
ported on Line 10, Schedule K-1, Form 1041. Allocable
portions of unused loss carryovers or excess deductions
upon termination are reported on Line 11, and allocable
portions of foreign taxes are reported on Line 14, Sched-
ule K-1. A computation for each should be prepared on
a separate sheet.
A number of miscellaneous items, not reported elsewhere
on Schedule K-1, are also reported on Line 14 or on
an attached statement. These include the beneficiary’s
share of:
Estimated taxes
Tax-exempt interest
Gross farming and fishing income
Investment income under Code Sec. 163(d)
Foreign trading gross income as defined in Code
Sec. 942(a)
Various tax credits
The John Tyler Trust must complete Schedule I, even
though it has no alternative minimum tax liability,
because it has made an income distribution to its ben-
eficiaries during the year.
The John Tyler Trust has an adjusted total income of
$45,471 (Line 17, Form 1041) to which taxes of $1,575
(Line 11, Form 1041) are added to obtain an adjusted
alternative minimum taxable income of $47,046 (Line
25, Schedule I) (the trust does not have any alternative
minimum tax adjustments, tax preference items or net
operating losses).
The trust is entitled to a distribution deduction on a
minimum tax basis of $19,514 (Line 44, Schedule I),
and the trust’s allocable share of the alternative minimum
taxable income (Line 29, Part I, Schedule I) is $27,532
($47,046 - $19,514).
1041_Prep_Book_10.indb 120
ESTATE TAX DEDUCTION
If an estate or trust includes in gross income an item of
income that had accrued as of the date of death so that
the item was included in the decedent’s estate for estate
tax purposes, the estate or trust may claim a correspond-
ing deduction based on the estate tax attributable to
the item’s net value. A deduction is also allowed for the
generation-skipping transfer tax that is imposed because
of a taxable termination or a direct skip that results from
the death of a transferor (Code Sec. 691(c)).
The above deductions are claimed on Line 19, page 1
of Form 1041. They are computed on a separate sheet
that must be attached to Form 1041.
EXEMPTIONS
An estate is entitled to an exemption of $600. The ex-
emption of a simple trust is $300. Complex trusts, such
as the one used in the example, are entitled to a $100
exemption. A $100 exemption is therefore entered on
Line 20, page 1, Form 1041. No exemption is allowed
on a final return.
In 2009, a qualified disability trust established solely for
the benefit of a disabled person under age 65 is allowed
a $3,650 exemption if the trust’s modified AGI does not
exceed $166,800.
COMPUTATION OF TAX
The tax computation is made on Schedule G, page 2,
Form 1041. The tax is computed either by using the Tax
Rate Schedule (also known as “regular tax rates”) or, if
eligible, the trust or estate may use the applicable rate for
net capital gains. The total tax liability (Line 7, Schedule
G) is reported on Line 23, page 1, Form 1041.
The John Tyler Trust has taxable income of $25,857,
which is subject to the top marginal rate of 35 per-
cent. Using the 2009 Tax Rate Schedule, the regular
tax on that amount would be $8,026. However, the
trust has net capital gains of $16,200 and qualified
dividends of $400, and may compute its tax liability
using the appropriate capital gains tax rate (Part V,
Schedule D, Form 1041). The maximum tax taking
into account the capital gains tax rate, as shown on
Line 35, Schedule D, is $4,744. Because this amount
is smaller than the $8,026 regular tax on Line 34, it is
entered on Line 1a, Schedule G, Form 1041.
Tax credits are offset against the tax liability in two differ-
ent places on Form 1041. The nonrefundable tax credits
10/19/2009 10:14:09 AM

are reported on Line 2, Schedule G, page 2, Form 1041,
and the refundable credits are reflected on Line 24, page
1, Form 1041. As to the nonrefundable credits:
The trust’s or estate’s share of the foreign tax credit
is reported on Schedule G, Line 2a (attach Form
1116)
Other nonbusiness credits are reported on Line 2b
The trust’s or estate’s share of business credits is re-
ported on Line 2c (attach the appropriate form)
The credits for prior years’ minimum tax (attach Form
8801) are reported on Line 2d
Recapture taxes from Line 5, Schedule G, are reported
either on Form 4255, Recapture of Investment Credit, or
on Form 8611, Recapture of Low-Income Housing Credit.
The alternative minimum tax is reported on Line 1c
(from Schedule I). An estate or trust that incurs house-
hold employment taxes lists the amount of these taxes on
Schedule G, Line 6 (attach Schedule H, Form 1040).
Alternative Minimum Tax
Schedule I, Form 1041, Alternative Minimum Tax, con-
sists of four parts. The estate or trust computes its share of
alternative minimum taxable income in Part I, its income
distribution deduction on a minimum tax basis in Part
II, its alternative minimum tax liability in Part III, and
the Part III Line 52 capital gain amount in Part IV.
The alternative minimum tax liability from Part III is
reported on Line 1c, Schedule G, page 2, Form 1041.
Part I and Part II of Schedule I have to be completed
for any year for which an income distribution deduction
has been claimed, regardless of whether or not there is
an alternative minimum tax liability.
Part III must be completed if the estate’s or trust’s share
of alternative minimum taxable income (Line 29, Part I)
exceeds $22,500. The computation in Part IV is required
for estates and trusts that have qualified dividends or
complete Schedule D, Form 1041, and have a gain on
Lines 14a and 15 of column (2) of Schedule D (Form
1041), as refigured for the AMT. The reduced rates that
apply to net long-term capital gain also apply when
figuring the alternative minimum tax.
Adjusted alternative minimum taxable income. In
determining adjusted alternative minimum taxable
income (AAMTI) on Line 25, Schedule I, a fiduciary
for an estate or a trust must combine Lines 1 through
24, which represent the estate’s or trust’s adjusted total
income or loss (Line 17, Form 1041 as entered on Line
1 of Schedule I) increased by its tax preferences and
1041_Prep_Book_10.indb 121
CASE STUDY 121
adjustments (Lines 2 through 23 of Schedule I) and
reduced by its alternative minimum tax net operating
loss deduction (Line 24 of Schedule I).
The alternative tax net operating loss deduction (AT-
NOLD) entered on Line 24 of Schedule I is the sum
of the alternative tax net operating loss (ATNOL) car-
ryovers and carrybacks to the current year.
An election to forego the carryback period for regular tax
purposes also applies for minimum tax purposes.
The alternative tax net operating loss deduction (AT-
NOLD) is modified by:
1. Adding adjustments (or subtracting if the adjustments
were negative) made under Code Secs. 56 and 58
to the NOL under Code Sec. 172.
2. Reducing the NOL by any item of tax preference
under Code Sec. 57 (except for the now repealed
appreciated charitable contribution preference
item).
Any ATNOL not used may be carried back 2 years and
forward for up to 20 years (prior to 1998, the carryfor-
ward period was limited to 15 years). In some cases, the
carryback period may be longer than 2 years.
PRACTICE POINTER: The treatment of ATNOLs does
not affect the regular tax NOL.
Estate’s or trust’s share of alternative minimum tax-
able income. The income distribution deduction from
Part II and the estate tax deduction are subtracted from
AAMTI (Lines 26 and 27, Schedule I) to obtain the
estate’s or trust’s share of alternative minimum taxable
income on Line 29, Schedule I.
Credits. Nonrefundable credits (other than the foreign
tax credit) may not be claimed against alternative mini-
mum tax liability. When a trust or estate seeks to offset its
alternative minimum tax liability with foreign tax credits,
it must complete and attach a separate Form 1116 for
each type of income specified at the top of Form 1116.
Then, at the top of that form, the trust or estate should
also add the phrase “Alt Min Tax.”
The John Tyler Trust must complete all four parts of
Schedule I. The John Tyler Trust is not subject to the tax
because its regular tax of $4,744 exceeded its tentative
alternative minimum tax (AMT) liability of $755.
The zero AMT tax liability was determined by first
reducing the trust’s alternative minimum taxable income
10/19/2009 10:14:09 AM
 122 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
($27,532 on Line 29) by the $22,500 exemption amount.
The $5,032 difference (Line 51) is the amount subject
to the applicable AMT tax rate. Although the applicable
tax rate is generally 26 percent on the first $175,000 of
AMTI as reduced by the exemption amount, long-term
capital gain of the trust which is subject to the 15 percent
rate for regular tax purposes is also subject to a 15 percent
rate for AMT purposes.
Since the Trust had $16,200 in long-term capital gain
and $400 in dividends subject to a 15 percent rate for
regular tax purposes, the entire $5,032 of AMTI is deemed
attributable to long-term capital gain and its tentative
alternative minimum tax is $755 ($5,032 × 15%) (Lines
72 and 73). No AMT is due because the $755 tentative
alternative minimum tax is less than the $4,744 .(PLEASE
COMPARE WITH TAX SHOWN ON PAGE 1, LINE
23 (4,774) – PIR) regular income tax liability entered
on Line 55.
Payments and Refundable Tax Credits
Any estimated tax payments (including amounts ap-
plied from the previous year) are reported on Line 24a
of Form 1041. If the fiduciary has elected to allocate
estimated taxes to beneficiaries, the amount so allocated
from Form 1041-T is entered on Line 24b, the amount
on Line 24b is subtracted from Line 24a, and the result
is entered on Line 24c.
1041_Prep_Book_10.indb 122
Taxes paid with an extension of time to file are reported
on Line 24d (attach Form 7004). Any erroneously with-
held (and not repaid) income taxes on wages and salaries
of a decedent that were received by the decedent’s estate
and any credit for back up withholding is reported on
Line 24e (attach Form W-2). Any credit for backup
withholding for income distributed should be reported
on Line 14, Schedule K-1.
The refundable tax credits for regulated investment
companies (attach Copy B of Form 2439) and the credit
for federal tax on special fuels (attach Form 4136) are
reported on Line 24f–g and totaled on Line 24h.
In the example for the John Tyler Trust, a total of $7,000
was paid for estimated taxes. This figure is entered on
Line 24a. Since there are no applicable tax credits, the
$7,000 figure is carried to Line 25 before being sub-
tracted from the amount on Line 23.
COMPLETION OF RETURN
The declaration at the bottom of page 1 calls for the
signature of the fiduciary, without a requirement of
notarization. Financial institutions that act as trustees
and submit estimated tax payments must provide their
employee identification number (EIN). A person who
received compensation for preparing the return must also
sign. The additional information required at the bottom
of page 2 must be supplied.
10/19/2009 10:14:09 AM
 FILLED IN FORMS 123

Department of the Treasury—Internal Revenue Service

1041
Form

U.S. Income Tax Return for Estates and Trusts 2009 OMB No. 1545-0092
A Type of entity (see instr.): For calendar year 2009 or fiscal year beginning , 2009, and ending , 20
Decedent’s estate Name of estate or trust (If a grantor type trust, see page 14 of the instructions.) C Employer identification number

f
Simple trust John Tyler Trust 21 1234567
Name and title of fiduciary D Date entity created

o
✔ Complex trust
Qualified disability trust South End Trust Co. 01/01/88
Number, street, and room or suite no. (If a P.O. box, see page 15 of the instructions.) E Nonexempt charitable and split-

s
ESBT (S portion only)
interest trusts, check applicable
Grantor type trust 25 Beach St boxes (see page 16 of the instr.):

a 9
Bankruptcy estate-Ch. 7 Described in section 4947(a)(1)
City or town, state, and ZIP code

t
Bankruptcy estate-Ch. 11 Not a private foundation

f 0
Pooled income fund Detroit, MI 48226 Described in section 4947(a)(2)

0
B Number of Schedules K-1 F Check

a
Initial return Final return Amended return Change in trust's name
attached (see applicable
2

2
instructions) 

r
boxes: Change in fiduciary Change in fiduciary's name Change in fiduciary's address

/
G Check here if the estate or filing trust made a section 645 election . . . . . . 

D /23
1 Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 5,000
2a Total ordinary dividends . . . . . . . . . . . . . . . . . . . . . . . . 2a 1,200
b Qualified dividends allocable to: (1) Beneficiaries 800 (2) Estate or trust 400
3 Business income or (loss). Attach Schedule C or C-EZ (Form 1040) . . . . . . . . . 3
Income

7
4 Capital gain or (loss). Attach Schedule D (Form 1041) . . . . . . . . . . . . . . 4 16,200
25,471

0
5 Rents, royalties, partnerships, other estates and trusts, etc. Attach Schedule E (Form 1040) . 5
6 Farm income or (loss). Attach Schedule F (Form 1040) . . . . . . . . . . . . . . 6
7 Ordinary gain or (loss). Attach Form 4797 . . . . . . . . . . . . . . . . . . 7
8 Other income. List type and amount 8
9 Total income. Combine lines 1, 2a, and 3 through 8 . . . . . . . . . . . . .  9 47,871
10 Interest. Check if Form 4952 is attached  . . . . . . . . . . . . . . . 10
11 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1,575
12 Fiduciary fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 675
13 Charitable deduction (from Schedule A, line 7) . . . . . . . . . . . . . . . . 13
150
Deductions

14 Attorney, accountant, and return preparer fees . . . . . . . . . . . . . . . . 14

15a Other deductions not subject to the 2% floor (attach schedule) . . . . . . . . . . . 15a
b Allowable miscellaneous itemized deductions subject to the 2% floor . . . . . . . . . 15b
16 Add lines 10 through 15b . . . . . . . . . . . . . . . . . . . . . .  16 2,400
17 Adjusted total income or (loss). Subtract line 16 from line 9 . . . 17 45,471
18 Income distribution deduction (from Schedule B, line 15). Attach Schedules K-1 (Form 1041) 18 19,514
19 Estate tax deduction including certain generation-skipping taxes (attach computation) . . . 19
20 Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 100
21 Add lines 18 through 20 . . . . . . . . . . . . . . . . . . . . . . .  21 19,614
22 Taxable income. Subtract line 21 from line 17. If a loss, see page 23 of the instructions . . . 22 25,857
23 Total tax (from Schedule G, line 7) . . . . . . . . . . . . . . . . . . . . 23 4,774
24 Payments: a 2009 estimated tax payments and amount applied from 2008 return . . . . 24a 7,000
Tax and Payments

b Estimated tax payments allocated to beneficiaries (from Form 1041-T) . . . . . . . . 24b

c Subtract line 24b from line 24a . . . . . . . . . . . . . . . . . . . . . 24c 7,000
d Tax paid with Form 7004 (see page 24 of the instructions) . . . . . . . . . . . . 24d
e Federal income tax withheld. If any is from Form(s) 1099, check  . . . . . . . . 24e
Other payments: f Form 2439 ; g Form 4136 ; Total  24h
25 Total payments. Add lines 24c through 24e, and 24h . . . . . . . . . . . . .  25 7,000
26 Estimated tax penalty (see page 24 of the instructions) . . . . . . . . . . . . . . 26
27 Tax due. If line 25 is smaller than the total of lines 23 and 26, enter amount owed . . . . . 27 0
28 Overpayment. If line 25 is larger than the total of lines 23 and 26, enter amount overpaid . . 28 2,256
29 Amount of line 28 to be: a Credited to 2010 estimated tax  ; b Refunded  29 2,256
Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct,
and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.
Sign

May the IRS discuss this return
Here  76 5432101 with the preparer shown below
(see instr.)? ✔ Yes No
Signature of fiduciary or officer representing fiduciary Date EIN of fiduciary if a financial institution

Paid
Preparer’s
 Preparer’s
signature
Date Check if
self-employed ✔
Preparer’s SSN or PTIN
456-08-6347


Firm’s name (or Riley P Burns 66 1071367
EIN
Use Only yours if self-employed),
address, and ZIP code 51 N Oak St, Detroit, MI 48216 Phone no. (317) 578-3267
For Privacy Act and Paperwork Reduction Act Notice, see the separate instructions. Cat. No. 11370H Form 1041 (2009)

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 124 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E

Form 1041 (2009) Page 2

Schedule A Charitable Deduction. Do not complete for a simple trust or a pooled income fund.
1 Amounts paid or permanently set aside for charitable purposes from gross income (see page 25) 1
2 Tax-exempt income allocable to charitable contributions (see page 25 of the instructions) . . . 2

f
3 Subtract line 2 from line 1 . . . . . . . . . . . . . . . . . . . . . . . . 3

o
4 Capital gains for the tax year allocated to corpus and paid or permanently set aside for charitable purposes 4
5 Add lines 3 and 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

s
6 Section 1202 exclusion allocable to capital gains paid or permanently set aside for charitable
purposes (see page 25 of the instructions) . . . . . . . . . . . . . . . . . . . 6

a 9
7 Charitable deduction. Subtract line 6 from line 5. Enter here and on page 1, line 13 . . . . . 7
Schedule B Income Distribution Deduction

ft 0
1 Adjusted total income (see page 26 of the instructions) . . . . . . . . . . . . . . . 1 45,471

0
2 Adjusted tax-exempt interest . . . . . . . . . . . . . . . . . . . . . . . 2 0

a /2
3 Total net gain from Schedule D (Form 1041), line 15, column (1) (see page 26 of the instructions) . 3

r
4 Enter amount from Schedule A, line 4 (minus any allocable section 1202 exclusion) . . . . . 4

D /23
5 Capital gains for the tax year included on Schedule A, line 1 (see page 26 of the instructions) . . 5
6 Enter any gain from page 1, line 4, as a negative number. If page 1, line 4, is a loss, enter the loss
as a positive number . . . . . . . . . . . . . . . . . . . . . . . . . . 6 (16,200)
7 Distributable net income. Combine lines 1 through 6. If zero or less, enter -0- . . . . . . . 7 29,271

7
8 If a complex trust, enter accounting income for the tax year as
determined under the governing instrument and applicable local law . 29,271

0
8
9 Income required to be distributed currently . . . . . . . . . . . . . . . . . . . 9 19,514
10 Other amounts paid, credited, or otherwise required to be distributed . . . . . . . . . . 10 0
11 Total distributions. Add lines 9 and 10. If greater than line 8, see page 26 of the instructions . . 11 19,514
12 Enter the amount of tax-exempt income included on line 11 . . . . . . . . . . . . . 12 0
13 Tentative income distribution deduction. Subtract line 12 from line 11 . . . . . . . . . . 13 19,514
14 Tentative income distribution deduction. Subtract line 2 from line 7. If zero or less, enter -0- . . 14 29,271
15 Income distribution deduction. Enter the smaller of line 13 or line 14 here and on page 1, line 18 15 19,514
Schedule G Tax Computation (see page 27 of the instructions)
1 Tax: a Tax on taxable income (see page 27 of the instructions) . . 1a 4,774
b Tax on lump-sum distributions. Attach Form 4972 . . . . 1b
c Alternative minimum tax (from Schedule I (Form 1041), line 56) 1c
d Total. Add lines 1a through 1c . . . . . . . . . . . . . . . . . . .  1d 4,774
2a Foreign tax credit. Attach Form 1116 . . . . . . . . . . . . 2a
b Other nonbusiness credits (attach schedule) . . . . . . . . . 2b
c General business credit. Attach Form 3800 . . . . . . . . . . 2c
d Credit for prior year minimum tax. Attach Form 8801 . . . . . . 2d
3 Total credits. Add lines 2a through 2d . . . . . . . . . . . . . . . . . . .  3 0
4 Subtract line 3 from line 1d. If zero or less, enter -0- . . . . . . . . . . . . . . . . 4 4,774
5 Recapture taxes. Check if from: Form 4255 Form 8611 . . . . . . . . . . . 5
6 Household employment taxes. Attach Schedule H (Form 1040) . . . . . . . . . . . . 6
7 Total tax. Add lines 4 through 6. Enter here and on page 1, line 23 . . . . . . . . . .  7 4,774
Other Information Yes No
1 Did the estate or trust receive tax-exempt income? If “Yes,” attach a computation of the allocation of expenses ✔
Enter the amount of tax-exempt interest income and exempt-interest dividends  $
2 Did the estate or trust receive all or any part of the earnings (salary, wages, and other compensation) of any
individual by reason of a contract assignment or similar arrangement? . . . . . . . . . . . . . . . ✔
3 At any time during calendar year 2009, did the estate or trust have an interest in or a signature or other authority
✔
over a bank, securities, or other financial account in a foreign country? . . . . . . . . . . . . . .
See page 29 of the instructions for exceptions and filing requirements for Form TD F 90-22.1. If “Yes,” enter the
name of the foreign country 
4 During the tax year, did the estate or trust receive a distribution from, or was it the grantor of, or transferor to, a
✔
foreign trust? If “Yes,” the estate or trust may have to file Form 3520. See page 29 of the instructions . . . .
5 Did the estate or trust receive, or pay, any qualified residence interest on seller-provided financing? If “Yes,” see
✔
page 30 for required attachment . . . . . . . . . . . . . . . . . . . . . . . . . . .
6 If this is an estate or a complex trust making the section 663(b) election, check here (see page 30) . . 
7 To make a section 643(e)(3) election, attach Schedule D (Form 1041), and check here (see page 30) . . 
8 If the decedent’s estate has been open for more than 2 years, attach an explanation for the delay in closing the estate, and check here 
9 Are any present or future trust beneficiaries skip persons? See page 30 of the instructions . . . . . . . . ✔
Form 1041 (2009)

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 FILLED IN FORMS 125

SCHEDULE I Alternative Minimum Tax—Estates and Trusts OMB No. 1545-0092

(Form 1041)
Department of the Treasury
Internal Revenue Service
 Attach to Form 1041. See the separate instructions
for Schedule I (Form 1041). 2009

f
Name of estate or trust Employer identification number

o
Part I Estate’s or Trust’s Share of Alternative Minimum Taxable Income
45,471

s
1 Adjusted total income or (loss) (from Form 1041, line 17) . . . . . . . . . . . . . . 1
2 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

a 9
3 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1,575

t
4 Miscellaneous itemized deductions (from Form 1041, line 15b) . . . . . . . . . . . . 4

f 0
5 Refund of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 ( )

0
6 Depletion (difference between regular tax and AMT) . . . . . . . . . . . . . . . . 6

a 2
7 Net operating loss deduction. Enter as a positive amount . . . . . . . . . . . . . . 7

r /
8 Interest from specified private activity bonds exempt from the regular tax . . . . . . . . . 8

D /10
9 Qualified small business stock (see page 2 of the instructions) . . . . . . . . . . . . 9
10 Exercise of incentive stock options (excess of AMT income over regular tax income) . . . . . 10
11 Other estates and trusts (amount from Schedule K-1 (Form 1041), box 12, code A) . . . . . 11
12 Electing large partnerships (amount from Schedule K-1 (Form 1065-B), box 6) . . . . . . . 12

09
13 Disposition of property (difference between AMT and regular tax gain or loss) . . . . . . . 13
14 Depreciation on assets placed in service after 1986 (difference between regular tax and AMT) . . 14
15 Passive activities (difference between AMT and regular tax income or loss) . . . . . . . . 15
16 Loss limitations (difference between AMT and regular tax income or loss) . . . . . . . . . 16
17 Circulation costs (difference between regular tax and AMT) . . . . . . . . . . . . . 17
18 Long-term contracts (difference between AMT and regular tax income) . . . . . . . . . 18
19 Mining costs (difference between regular tax and AMT) . . . . . . . . . . . . . . . 19
20 Research and experimental costs (difference between regular tax and AMT) . . . . . . . . 20
21 Income from certain installment sales before January 1, 1987 . . . . . . . . . . . . 21 ( )
22 Intangible drilling costs preference . . . . . . . . . . . . . . . . . . . . . 22
23 Other adjustments, including income-based related adjustments . . . . . . . . . . . 23
24 Alternative tax net operating loss deduction (See the instructions for the limitation that applies.) . 24 ( )
25 Adjusted alternative minimum taxable income. Combine lines 1 through 24 . . . . . . . . 25 47,046
Note: Complete Part II below before going to line 26.
26 Income distribution deduction from Part II, line 44 . . . . . . . 26 19,514
27 Estate tax deduction (from Form 1041, line 19) . . . . . . . . 27
28 Add lines 26 and 27 . . . . . . . . . . . . . . . . . . . . . . . . . . 28 19,514
29 Estate’s or trust’s share of alternative minimum taxable income. Subtract line 28 from line 25 . . 29 27,532
If line 29 is:
● $22,500 or less, stop here and enter -0- on Form 1041, Schedule G, line 1c. The estate or
trust is not liable for the alternative minimum tax.
● Over $22,500, but less than $165,000, go to line 45.
● $165,000 or more, enter the amount from line 29 on line 51 and go to line 52.
Part II Income Distribution Deduction on a Minimum Tax Basis
30 Adjusted alternative minimum taxable income (see page 6 of the instructions) . . . . . . . 30 47,046
31 Adjusted tax-exempt interest (other than amounts included on line 8) . . . . . . . . . . 31
32 Total net gain from Schedule D (Form 1041), line 15, column (1). If a loss, enter -0- . . . . . 32
33 Capital gains for the tax year allocated to corpus and paid or permanently set aside for charitable
purposes (from Form 1041, Schedule A, line 4) . . . . . . . . . . . . . . . . . 33
34 Capital gains paid or permanently set aside for charitable purposes from gross income (see page
6 of the instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . 34
35 Capital gains computed on a minimum tax basis included on line 25 . . . . . . . . . . 35 ( 16,200 )
36 Capital losses computed on a minimum tax basis included on line 25. Enter as a positive amount 36
37 Distributable net alternative minimum taxable income (DNAMTI). Combine lines 30 through 36.
If zero or less, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . 37 30,846
38 Income required to be distributed currently (from Form 1041, Schedule B, line 9) . . . . . . 38 19,514
39 Other amounts paid, credited, or otherwise required to be distributed (from Form 1041, Schedule B, line 10) 39 0
40 Total distributions. Add lines 38 and 39 . . . . . . . . . . . . . . . . . . . . 40 19,514
41 Tax-exempt income included on line 40 (other than amounts included on line 8) . . . . . . 41 0
42 Tentative income distribution deduction on a minimum tax basis. Subtract line 41 from line 40 . . 42 19,514
For Privacy Act and Paperwork Reduction Act Notice, see the Instructions for Form 1041. Cat. No. 51517Q Schedule I (Form 1041) (2009)

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 126 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E

Schedule I (Form 1041) (2009) Page 2

Part II Income Distribution Deduction on a Minimum Tax Basis (continued)
43 Tentative income distribution deduction on a minimum tax basis. Subtract line 31 from line 37.
If zero or less, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . 43 30,846

f
44 Income distribution deduction on a minimum tax basis. Enter the smaller of line 42 or line 43.

o
Enter here and on line 26 . . . . . . . . . . . . . . . . . . . . . . . . . 44 19,541
Part III Alternative Minimum Tax

s 9
45 Exemption amount . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 $22,500 00
46 Enter the amount from line 29 . . . . . . . . . . . . . . 46 27,532

a
47 Phase-out of exemption amount . . . . . . . . . . . . . 47 $75,000 00

t
48 Subtract line 47 from line 46. If zero or less, enter -0- . . . . . . 48

f 0
49 Multiply line 48 by 25% (.25) . . . . . . . . . . . . . . . . . . . . . . . 49 0

0
50 Subtract line 49 from line 45. If zero or less, enter -0- . . . . . . . . . . . . . . . 50 22,500

a
5,032

2
51 Subtract line 50 from line 46 . . . . . . . . . . . . . . . . . . . . . . . 51

r /
52 Go to Part IV of Schedule I to figure line 52 if the estate or trust has qualified dividends or has a

D /10
gain on lines 14a and 15 of column (2) of Schedule D (Form 1041) (as refigured for the AMT, if
necessary). Otherwise, if line 51 is—
● $175,000 or less, multiply line 51 by 26% (.26).
● Over $175,000, multiply line 51 by 28% (.28) and subtract $3,500 from the result . . . . . 52 755

9
53 Alternative minimum foreign tax credit (see page 7 of the instructions) . . . . . . . . . . 53 0
755

0
54 Tentative minimum tax. Subtract line 53 from line 52 . . . . . . . . . . . . . . . 54
55 Enter the tax from Form 1041, Schedule G, line 1a (minus any foreign tax credit from Schedule G, line 2a) 55 5,256
56 Alternative minimum tax. Subtract line 55 from line 54. If zero or less, enter -0-. Enter here and
on Form 1041, Schedule G, line 1c . . . . . . . . . . . . . . . . . . . . . 56 0
Part IV Line 52 Computation Using Maximum Capital Gains Rates
Caution: If you did not complete Part V of Schedule D (Form 1041), the Schedule D Tax Worksheet,
or the Qualified Dividends Tax Worksheet, see page 8 of the instructions before completing this part.
57 Enter the amount from line 51 . . . . . . . . . . . . . . . . . . . . . . . 57 5,032
58 Enter the amount from Schedule D (Form 1041), line 22, line 13 of the
Schedule D Tax Worksheet, or line 4 of the Qualified Dividends Tax
Worksheet, whichever applies (as refigured for the AMT, if necessary) 58 16,600
59 Enter the amount from Schedule D (Form 1041), line 14b, column (2)
(as refigured for the AMT, if necessary). If you did not complete
Schedule D for the regular tax or the AMT, enter -0- . . . . . . . 59 16,600
60 If you did not complete a Schedule D Tax Worksheet for the regular tax
or the AMT, enter the amount from line 58. Otherwise, add lines 58 and
59 and enter the smaller of that result or the amount from line 10 of the
Schedule D Tax Worksheet (as refigured for the AMT, if necessary) . . 60
61 Enter the smaller of line 57 or line 60 . . . . . . . . . . . . . . . . . . . . 61 5,032
62 Subtract line 61 from line 57 . . . . . . . . . . . . . . . . . . . . . . . 62 0
63 If line 62 is $175,000 or less, multiply line 62 by 26% (.26). Otherwise, multiply line 62 by 28%
(.28) and subtract $3,500 from the result . . . . . . . . . . . . . . . . . .  63 0
64 Maximum amount subject to the 0% rate . . . . . . . . . . 64 $2,300 00
65 Enter the amount from line 23 of Schedule D (Form 1041), line 14 of the
Schedule D Tax Worksheet, or line 5 of the Qualified Dividends Tax
Worksheet on page 27 of the Instructions for Form 1041, whichever
applies (as figured for the regular tax). If you did not complete
Schedule D or either worksheet for the regular tax, enter -0- . . . . 65 9,257
66 Subtract line 65 from line 64. If zero or less, enter -0- . . . . . . 66 0
67 Enter the smaller of line 57 or line 58 . . . . . . . . . . . 67 5,032
68 Enter the smaller of line 66 or line 67 . . . . . . . . . . . 68 0
69 Subtract line 68 from line 67 . . . . . . . . . . . . . . 69 5,032
70 Multiply line 69 by 15% (.15) . . . . . . . . . . . . . . . . . . . . . .  70 755
If line 59 is zero or blank, skip lines 71 and 72 and go to line 73. Otherwise, go to line 71.
71 Subtract line 67 from line 61 . . . . . . . . . . . . . . 71 0
72 Multiply line 71 by 25% (.25) . . . . . . . . . . . . . . . . . . . . . .  72 0
73 Add lines 63, 70, and 72 . . . . . . . . . . . . . . . . . . . . . . . . . 73 755
74 If line 57 is $175,000 or less, multiply line 57 by 26% (.26). Otherwise, multiply line 57 by 28%
(.28) and subtract $3,500 from the result . . . . . . . . . . . . . . . . . . . 74 1,308
75 Enter the smaller of line 73 or line 74 here and on line 52 . . . . . . . . . . . . . . 75 755
Schedule I (Form 1041) (2009)

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 FILLED IN FORMS 127

SCHEDULE D OMB No. 1545-0092

(Form 1041) Capital Gains and Losses
Department of the Treasury
Internal Revenue Service
 Attach to Form 1041, Form 5227, or Form 990-T. See the separate
instructions for Form 1041 (also for Form 5227 or Form 990-T, if applicable).
2009

f
Name of estate or trust Employer identification number
John Tyler Trust 21 1234567

o
Note: Form 5227 filers need to complete only Parts I and II.
Part I Short-Term Capital Gains and Losses—Assets Held One Year or Less

s
(a) Description of property (b) Date acquired (c) Date sold (e) Cost or other basis (f) Gain or (loss) for

a
(d) Sales price (see page 4 of the the entire year

9
(Example: 100 shares 7% preferred of “Z” Co.) (mo., day, yr.) (mo., day, yr.) instructions) Subtract (e) from (d)

t
1a Co-Work Corp.

f 0
02-06-09 04-22-09 44,000 50,000 (6,000)

0
7,000 shares common

ra /2
D /10
2
0 9
b Enter the short-term gain or (loss), if any, from Schedule D-1, line 1b

Short-term capital gain or (loss) from Forms 4684, 6252, 6781, and 8824 .
. . .

.
.

.
.

.
.

.
.

.
.

.
.

.
.

.
1b

3 Net short-term gain or (loss) from partnerships, S corporations, and other estates or trusts . . . 3
4 Short-term capital loss carryover. Enter the amount, if any, from line 9 of the 2008 Capital Loss
Carryover Worksheet . . . . . . . . . . . . . . . . . . . . . . . . . . 4 ( )
5 Net short-term gain or (loss). Combine lines 1a through 4 in column (f). Enter here and on line 13,
column (3) on the back . . . . . . . . . . . . . . . . . . . . . . . .  5 (6,000)
Part II Long-Term Capital Gains and Losses—Assets Held More Than One Year
(a) Description of property (b) Date acquired (c) Date sold (e) Cost or other basis (f) Gain or (loss) for
(d) Sales price (see page 4 of the the entire year
(Example: 100 shares 7% preferred of “Z” Co.) (mo., day, yr.) (mo., day, yr.) instructions) Subtract (e) from (d)
6a Mixture Corp.
02-06-05 05-01-09 47,200 25,000 22,200

b Enter the long-term gain or (loss), if any, from Schedule D-1, line 6b . . . . . . . . . . 6b

7 Long-term capital gain or (loss) from Forms 2439, 4684, 6252, 6781, and 8824 . . . . . . . 7

8 Net long-term gain or (loss) from partnerships, S corporations, and other estates or trusts . . . 8

9 Capital gain distributions . . . . . . . . . . . . . . . . . . . . . . . . . 9

10 Gain from Form 4797, Part I . . . . . . . . . . . . . . . . . . . . . . . . 10

11 Long-term capital loss carryover. Enter the amount, if any, from line 14 of the 2008 Capital Loss
Carryover Worksheet . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ( )
12 Net long-term gain or (loss). Combine lines 6a through 11 in column (f). Enter here and on line 14a,
column (3) on the back . . . . . . . . . . . . . . . . . . . . . . . .  12 22,200
For Paperwork Reduction Act Notice, see the Instructions for Form 1041. Cat. No. 11376V Schedule D (Form 1041) 2009

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 128 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E

Schedule D (Form 1041) 2009 Page 2

Part III Summary of Parts I and II (1) Beneficiaries’ (2) Estate’s
(3) Total
Caution: Read the instructions before completing this part. (see page 5) or trust’s
13 Net short-term gain or (loss) . . . . . . . . . . 13 (6,000) (6,000)

f
14 Net long-term gain or (loss):

o
a Total for year . . . . . . . . . . . . . . . 14a 22,200 22,200
b Unrecaptured section 1250 gain (see line 18 of the wrksht.) . 14b

s
c 28% rate gain . . . . . . . . . . . . . . . 14c
15 Total net gain or (loss). Combine lines 13 and 14a . .  15 16,200 16,200

a 9
Note: If line 15, column (3), is a net gain, enter the gain on Form 1041, line 4 (or Form 990-T, Part I, line 4a). If lines 14a and 15, column (2), are net

t
gains, go to Part V, and do not complete Part IV. If line 15, column (3), is a net loss, complete Part IV and the Capital Loss Carryover Worksheet, as

f 0
necessary.

0
Part IV Capital Loss Limitation

a /2
16 Enter here and enter as a (loss) on Form 1041, line 4 (or Form 990-T, Part I, line 4c, if a trust), the smaller of:

r
a The loss on line 15, column (3) or b $3,000 . . . . . . . . . . . . . . . . . 16 ( )

D /10
Note: If the loss on line 15, column (3), is more than $3,000, or if Form 1041, page 1, line 22 (or Form 990-T, line 34), is a loss, complete the Capital
Loss Carryover Worksheet on page 7 of the instructions to figure your capital loss carryover.
Part V Tax Computation Using Maximum Capital Gains Rates
Form 1041 filers. Complete this part only if both lines 14a and 15 in column (2) are gains, or an amount is entered in Part I or Part II and there is an

9
entry on Form 1041, line 2b(2), and Form 1041, line 22, is more than zero.

0
Caution: Skip this part and complete the worksheet on page 8 of the instructions if:
● Either line 14b, col. (2) or line 14c, col. (2) is more than zero, or
● Both Form 1041, line 2b(1), and Form 4952, line 4g are more than zero.
Form 990-T trusts. Complete this part only if both lines 14a and 15 are gains, or qualified dividends are included in income in Part I of Form 990-T,
and Form 990-T, line 34, is more than zero. Skip this part and complete the worksheet on page 8 of the instructions if either line 14b, col. (2) or line
14c, col. (2) is more than zero.

17 Enter taxable income from Form 1041, line 22 (or Form 990-T, line 34) . . 17 25,857
18 Enter the smaller of line 14a or 15 in column (2)
but not less than zero . . . . . . . . . 18 16,200
19 Enter the estate’s or trust’s qualified dividends from
Form 1041, line 2b(2) (or enter the qualified dividends
included in income in Part I of Form 990-T) . . . . 400
19
20 Add lines 18 and 19 . . . . . . . . . 20 16,600
21 If the estate or trust is filing Form 4952, enter the
amount from line 4g; otherwise, enter -0- . .  21 0
22 Subtract line 21 from line 20. If zero or less, enter -0- . . . . . . . 22 16,600
23 Subtract line 22 from line 17. If zero or less, enter -0- . . . . . . . 23 9,257

24 Enter the smaller of the amount on line 17 or $2,300 . . . . . . . 24 2,300

25 Is the amount on line 23 equal to or more than the amount on line 24?
✔ Yes. Skip lines 25 and 26; go to line 27 and check the “No” box.

✔ No. Enter the amount from line 23 . . . . . . . . . . . . 25

26 Subtract line 25 from line 24 . . . . . . . . . . . . . . . 26
27 Are the amounts on lines 22 and 26 the same?
Yes. Skip lines 27 thru 30; go to line 31. No. Enter the smaller of line 17 or line 22 27 16,600

28 Enter the amount from line 26 (If line 26 is blank, enter -0-) . . . . . 28 0

29 Subtract line 28 from line 27 . . . . . . . . . . . . . . . 29 2,490

30 Multiply line 29 by 15% (.15) . . . . . . . . . . . . . . . . . . . . . . . 30 2,254
31 Figure the tax on the amount on line 23. Use the 2009 Tax Rate Schedule for Estates and Trusts
(see the Schedule G instructions in the instructions for Form 1041) . . . . . . . . . . . 31 4,744

32 Add lines 30 and 31 . . . . . . . . . . . . . . . . . . . . . . . . . . 32 8,026

33 Figure the tax on the amount on line 17. Use the 2009 Tax Rate Schedule for Estates and Trusts
(see the Schedule G instructions in the instructions for Form 1041) . . . . . . . . . . . 33 4,744
34 Tax on all taxable income. Enter the smaller of line 32 or line 33 here and on Form 1041, Schedule
G, line 1a (or Form 990-T, line 36) . . . . . . . . . . . . . . . . . . . . . . 34 4,744
Schedule D (Form 1041) 2009

1041_Prep_Book_10.indb 128 10/19/2009 10:14:12 AM

 FILLED IN FORMS 129

661109
Final K-1 Amended K-1 OMB No. 1545-0092
Schedule K-1 Part III Beneficiary’s Share of Current Year Income,
(Form 1041)
Department of the Treasury
2009 Deductions, Credits, and Other Items
Interest income 11 Final year deductions
For calendar year 2009, 1

f
Internal Revenue Service
or tax year beginning, , 2009, 1,667

o
and ending , 20 2a Ordinary dividends
800
Beneficiary’s Share of Income, Deductions, 2b Qualified dividends

s
400
Credits, etc. 
See back of form and instructions.

a 9
3 Net short-term capital gain
Part I Information About the Estate or Trust

ft 0
A Estate’s or trust’s employer identification number 4a Net long-term capital gain

a 0
21-1234567
4b 28% rate gain 12 Alternative minimum tax adjustment

r
D /28/ 2
B Estate’s or trust’s name
John Tyler Trust 4c Unrecaptured section 1250 gain

5 Other portfolio and

nonbusiness income

8
C Fiduciary's name, address, city, state, and ZIP code
South End Trust Co. Ordinary business income

0
6
25 South Beach St.
Detroit, MI 48226
7 Net rental real estate income
7,690 13 Credits and credit recapture
8 Other rental income
9,757
9 Directly apportioned deductions

D Check if Form 1041-T was filed and enter the date it was filed
14 Other information

E Check if this is the final Form 1041 for the estate or trust
10 Estate tax deduction
Part II Information About the Beneficiary
F Beneficiary's identifying number
311-62-4070
G Beneficiary's name, address, city, state, and ZIP code
Mary S. Warden
7891 Code Drive
Chicago, IL 60600

*See attached statement for additional information.

Note. A statement must be attached showing the
beneficiary’s share of income and directly apportioned
deductions from each business, rental real estate, and
other rental activity.
For IRS Use Only

H ✔ Domestic beneficiary Foreign beneficiary

For Paperwork Reduction Act Notice, see the Instructions for Form 1041. Cat. No. 11380D Schedule K-1 (Form 1041) 2009

1041_Prep_Book_10.indb 129 10/19/2009 10:14:13 AM

1041_Prep_Book_10.indb 130 10/19/2009 10:14:14 AM
 FORM 1041 131

Department of the Treasury—Internal Revenue Service

1041
Form

U.S. Income Tax Return for Estates and Trusts 2009 OMB No. 1545-0092
A Type of entity (see instr.): For calendar year 2009 or fiscal year beginning , 2009, and ending , 20
Decedent’s estate Name of estate or trust (If a grantor type trust, see page 14 of the instructions.) C Employer identification number

f
Simple trust
Name and title of fiduciary D Date entity created

o
Complex trust
Qualified disability trust
Number, street, and room or suite no. (If a P.O. box, see page 15 of the instructions.) E Nonexempt charitable and split-

s
ESBT (S portion only)
interest trusts, check applicable
Grantor type trust boxes (see page 16 of the instr.):

a 9
Bankruptcy estate-Ch. 7 Described in section 4947(a)(1)
City or town, state, and ZIP code

t
Bankruptcy estate-Ch. 11 Not a private foundation

f 0
Pooled income fund Described in section 4947(a)(2)

0
B Number of Schedules K-1 F Check

a
Initial return Final return Amended return Change in trust's name
attached (see applicable

2
instructions) 

r
boxes: Change in fiduciary Change in fiduciary's name Change in fiduciary's address

/
G Check here if the estate or filing trust made a section 645 election . . . . . . 

D /23
1 Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2a Total ordinary dividends . . . . . . . . . . . . . . . . . . . . . . . . 2a
b Qualified dividends allocable to: (1) Beneficiaries (2) Estate or trust
3 Business income or (loss). Attach Schedule C or C-EZ (Form 1040) . . . . . . . . . 3
Income

07
4 Capital gain or (loss). Attach Schedule D (Form 1041) . . . . . . . . . . . . . . 4
5 Rents, royalties, partnerships, other estates and trusts, etc. Attach Schedule E (Form 1040) . 5
6 Farm income or (loss). Attach Schedule F (Form 1040) . . . . . . . . . . . . . . 6
7 Ordinary gain or (loss). Attach Form 4797 . . . . . . . . . . . . . . . . . . 7
8 Other income. List type and amount 8
9 Total income. Combine lines 1, 2a, and 3 through 8 . . . . . . . . . . . . .  9
10 Interest. Check if Form 4952 is attached  . . . . . . . . . . . . . . . 10
11 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
12 Fiduciary fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
13 Charitable deduction (from Schedule A, line 7) . . . . . . . . . . . . . . . . 13
Deductions

14 Attorney, accountant, and return preparer fees . . . . . . . . . . . . . . . . 14

15a Other deductions not subject to the 2% floor (attach schedule) . . . . . . . . . . . 15a
b Allowable miscellaneous itemized deductions subject to the 2% floor . . . . . . . . . 15b
16 Add lines 10 through 15b . . . . . . . . . . . . . . . . . . . . . .  16
17 Adjusted total income or (loss). Subtract line 16 from line 9 . . . 17
18 Income distribution deduction (from Schedule B, line 15). Attach Schedules K-1 (Form 1041) 18
19 Estate tax deduction including certain generation-skipping taxes (attach computation) . . . 19
20 Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
21 Add lines 18 through 20 . . . . . . . . . . . . . . . . . . . . . . .  21
22 Taxable income. Subtract line 21 from line 17. If a loss, see page 23 of the instructions . . . 22
23 Total tax (from Schedule G, line 7) . . . . . . . . . . . . . . . . . . . . 23
24 Payments: a 2009 estimated tax payments and amount applied from 2008 return . . . . 24a
Tax and Payments

b Estimated tax payments allocated to beneficiaries (from Form 1041-T) . . . . . . . . 24b

c Subtract line 24b from line 24a . . . . . . . . . . . . . . . . . . . . . 24c
d Tax paid with Form 7004 (see page 24 of the instructions) . . . . . . . . . . . . 24d
e Federal income tax withheld. If any is from Form(s) 1099, check  . . . . . . . . 24e
Other payments: f Form 2439 ; g Form 4136 ; Total  24h
25 Total payments. Add lines 24c through 24e, and 24h . . . . . . . . . . . . .  25
26 Estimated tax penalty (see page 24 of the instructions) . . . . . . . . . . . . . . 26
27 Tax due. If line 25 is smaller than the total of lines 23 and 26, enter amount owed . . . . . 27
28 Overpayment. If line 25 is larger than the total of lines 23 and 26, enter amount overpaid . . 28
29 Amount of line 28 to be: a Credited to 2010 estimated tax  ; b Refunded  29
Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct,
and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.
Sign

May the IRS discuss this return
Here  with the preparer shown below
(see instr.)? Yes No
Signature of fiduciary or officer representing fiduciary Date EIN of fiduciary if a financial institution

Paid
Preparer’s
 Preparer’s
signature
Date Check if
self-employed
Preparer’s SSN or PTIN


Firm’s name (or
EIN
Use Only yours if self-employed),
address, and ZIP code Phone no.
For Privacy Act and Paperwork Reduction Act Notice, see the separate instructions. Cat. No. 11370H Form 1041 (2009)

1041_Prep_Book_10.indb 131 10/19/2009 10:14:14 AM

 132 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E

Form 1041 (2009) Page 2

Schedule A Charitable Deduction. Do not complete for a simple trust or a pooled income fund.
1 Amounts paid or permanently set aside for charitable purposes from gross income (see page 25) 1
2 Tax-exempt income allocable to charitable contributions (see page 25 of the instructions) . . . 2

f
3 Subtract line 2 from line 1 . . . . . . . . . . . . . . . . . . . . . . . . 3

o
4 Capital gains for the tax year allocated to corpus and paid or permanently set aside for charitable purposes 4
5 Add lines 3 and 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

s 9
6 Section 1202 exclusion allocable to capital gains paid or permanently set aside for charitable
purposes (see page 25 of the instructions) . . . . . . . . . . . . . . . . . . . 6

a
7 Charitable deduction. Subtract line 6 from line 5. Enter here and on page 1, line 13 . . . . . 7
Schedule B Income Distribution Deduction

ft 0
1 Adjusted total income (see page 26 of the instructions) . . . . . . . . . . . . . . . 1

0
2 Adjusted tax-exempt interest . . . . . . . . . . . . . . . . . . . . . . . 2

a 2
3 Total net gain from Schedule D (Form 1041), line 15, column (1) (see page 26 of the instructions) . 3

r /
4 Enter amount from Schedule A, line 4 (minus any allocable section 1202 exclusion) . . . . . 4

D /23
5 Capital gains for the tax year included on Schedule A, line 1 (see page 26 of the instructions) . . 5
6 Enter any gain from page 1, line 4, as a negative number. If page 1, line 4, is a loss, enter the loss
as a positive number . . . . . . . . . . . . . . . . . . . . . . . . . . 6
7 Distributable net income. Combine lines 1 through 6. If zero or less, enter -0- . . . . . . . 7

7
8 If a complex trust, enter accounting income for the tax year as
determined under the governing instrument and applicable local law .

0
8
9 Income required to be distributed currently . . . . . . . . . . . . . . . . . . . 9
10 Other amounts paid, credited, or otherwise required to be distributed . . . . . . . . . . 10
11 Total distributions. Add lines 9 and 10. If greater than line 8, see page 26 of the instructions . . 11
12 Enter the amount of tax-exempt income included on line 11 . . . . . . . . . . . . . 12
13 Tentative income distribution deduction. Subtract line 12 from line 11 . . . . . . . . . . 13
14 Tentative income distribution deduction. Subtract line 2 from line 7. If zero or less, enter -0- . . 14
15 Income distribution deduction. Enter the smaller of line 13 or line 14 here and on page 1, line 18 15
Schedule G Tax Computation (see page 27 of the instructions)
1 Tax: a Tax on taxable income (see page 27 of the instructions) . . 1a
b Tax on lump-sum distributions. Attach Form 4972 . . . . 1b
c Alternative minimum tax (from Schedule I (Form 1041), line 56) 1c
d Total. Add lines 1a through 1c . . . . . . . . . . . . . . . . . . .  1d
2a Foreign tax credit. Attach Form 1116 . . . . . . . . . . . . 2a
b Other nonbusiness credits (attach schedule) . . . . . . . . . 2b
c General business credit. Attach Form 3800 . . . . . . . . . . 2c
d Credit for prior year minimum tax. Attach Form 8801 . . . . . . 2d
3 Total credits. Add lines 2a through 2d . . . . . . . . . . . . . . . . . . .  3
4 Subtract line 3 from line 1d. If zero or less, enter -0- . . . . . . . . . . . . . . . . 4
5 Recapture taxes. Check if from: Form 4255 Form 8611 . . . . . . . . . . . 5
6 Household employment taxes. Attach Schedule H (Form 1040) . . . . . . . . . . . . 6
7 Total tax. Add lines 4 through 6. Enter here and on page 1, line 23 . . . . . . . . . .  7
Other Information Yes No
1 Did the estate or trust receive tax-exempt income? If “Yes,” attach a computation of the allocation of expenses
Enter the amount of tax-exempt interest income and exempt-interest dividends  $
2 Did the estate or trust receive all or any part of the earnings (salary, wages, and other compensation) of any
individual by reason of a contract assignment or similar arrangement? . . . . . . . . . . . . . . .
3 At any time during calendar year 2009, did the estate or trust have an interest in or a signature or other authority
over a bank, securities, or other financial account in a foreign country? . . . . . . . . . . . . . .
See page 29 of the instructions for exceptions and filing requirements for Form TD F 90-22.1. If “Yes,” enter the
name of the foreign country 
4 During the tax year, did the estate or trust receive a distribution from, or was it the grantor of, or transferor to, a
foreign trust? If “Yes,” the estate or trust may have to file Form 3520. See page 29 of the instructions . . . .
5 Did the estate or trust receive, or pay, any qualified residence interest on seller-provided financing? If “Yes,” see
page 30 for required attachment . . . . . . . . . . . . . . . . . . . . . . . . . . .
6 If this is an estate or a complex trust making the section 663(b) election, check here (see page 30) . . 
7 To make a section 643(e)(3) election, attach Schedule D (Form 1041), and check here (see page 30) . . 
8 If the decedent’s estate has been open for more than 2 years, attach an explanation for the delay in closing the estate, and check here 
9 Are any present or future trust beneficiaries skip persons? See page 30 of the instructions . . . . . . . .
Form 1041 (2009)

1041_Prep_Book_10.indb 132 10/19/2009 10:14:14 AM

 FORM 1041 133

SCHEDULE I Alternative Minimum Tax—Estates and Trusts OMB No. 1545-0092

(Form 1041)
Department of the Treasury
Internal Revenue Service
 Attach to Form 1041. See the separate instructions
for Schedule I (Form 1041). 2009

f
Name of estate or trust Employer identification number

o
Part I Estate’s or Trust’s Share of Alternative Minimum Taxable Income

s
1 Adjusted total income or (loss) (from Form 1041, line 17) . . . . . . . . . . . . . . 1
2 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

a 9
3 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

t
4 Miscellaneous itemized deductions (from Form 1041, line 15b) . . . . . . . . . . . . 4

f 0
5 Refund of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 ( )

0
6 Depletion (difference between regular tax and AMT) . . . . . . . . . . . . . . . . 6

a 2
7 Net operating loss deduction. Enter as a positive amount . . . . . . . . . . . . . . 7

r /
8 Interest from specified private activity bonds exempt from the regular tax . . . . . . . . . 8

D /10
9 Qualified small business stock (see page 2 of the instructions) . . . . . . . . . . . . 9
10 Exercise of incentive stock options (excess of AMT income over regular tax income) . . . . . 10
11 Other estates and trusts (amount from Schedule K-1 (Form 1041), box 12, code A) . . . . . 11
12 Electing large partnerships (amount from Schedule K-1 (Form 1065-B), box 6) . . . . . . . 12

09
13 Disposition of property (difference between AMT and regular tax gain or loss) . . . . . . . 13
14 Depreciation on assets placed in service after 1986 (difference between regular tax and AMT) . . 14
15 Passive activities (difference between AMT and regular tax income or loss) . . . . . . . . 15
16 Loss limitations (difference between AMT and regular tax income or loss) . . . . . . . . . 16
17 Circulation costs (difference between regular tax and AMT) . . . . . . . . . . . . . 17
18 Long-term contracts (difference between AMT and regular tax income) . . . . . . . . . 18
19 Mining costs (difference between regular tax and AMT) . . . . . . . . . . . . . . . 19
20 Research and experimental costs (difference between regular tax and AMT) . . . . . . . . 20
21 Income from certain installment sales before January 1, 1987 . . . . . . . . . . . . 21 ( )
22 Intangible drilling costs preference . . . . . . . . . . . . . . . . . . . . . 22
23 Other adjustments, including income-based related adjustments . . . . . . . . . . . 23
24 Alternative tax net operating loss deduction (See the instructions for the limitation that applies.) . 24 ( )
25 Adjusted alternative minimum taxable income. Combine lines 1 through 24 . . . . . . . . 25
Note: Complete Part II below before going to line 26.
26 Income distribution deduction from Part II, line 44 . . . . . . . 26
27 Estate tax deduction (from Form 1041, line 19) . . . . . . . . 27
28 Add lines 26 and 27 . . . . . . . . . . . . . . . . . . . . . . . . . . 28
29 Estate’s or trust’s share of alternative minimum taxable income. Subtract line 28 from line 25 . . 29
If line 29 is:
● $22,500 or less, stop here and enter -0- on Form 1041, Schedule G, line 1c. The estate or
trust is not liable for the alternative minimum tax.
● Over $22,500, but less than $165,000, go to line 45.
● $165,000 or more, enter the amount from line 29 on line 51 and go to line 52.
Part II Income Distribution Deduction on a Minimum Tax Basis
30 Adjusted alternative minimum taxable income (see page 6 of the instructions) . . . . . . . 30
31 Adjusted tax-exempt interest (other than amounts included on line 8) . . . . . . . . . . 31
32 Total net gain from Schedule D (Form 1041), line 15, column (1). If a loss, enter -0- . . . . . 32
33 Capital gains for the tax year allocated to corpus and paid or permanently set aside for charitable
purposes (from Form 1041, Schedule A, line 4) . . . . . . . . . . . . . . . . . 33
34 Capital gains paid or permanently set aside for charitable purposes from gross income (see page
6 of the instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . 34
35 Capital gains computed on a minimum tax basis included on line 25 . . . . . . . . . . 35 ( )
36 Capital losses computed on a minimum tax basis included on line 25. Enter as a positive amount 36
37 Distributable net alternative minimum taxable income (DNAMTI). Combine lines 30 through 36.
If zero or less, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . 37
38 Income required to be distributed currently (from Form 1041, Schedule B, line 9) . . . . . . 38
39 Other amounts paid, credited, or otherwise required to be distributed (from Form 1041, Schedule B, line 10) 39
40 Total distributions. Add lines 38 and 39 . . . . . . . . . . . . . . . . . . . . 40
41 Tax-exempt income included on line 40 (other than amounts included on line 8) . . . . . . 41
42 Tentative income distribution deduction on a minimum tax basis. Subtract line 41 from line 40 . . 42
For Privacy Act and Paperwork Reduction Act Notice, see the Instructions for Form 1041. Cat. No. 51517Q Schedule I (Form 1041) (2009)

1041_Prep_Book_10.indb 133 10/19/2009 10:14:15 AM

 134 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E

Schedule I (Form 1041) (2009) Page 2

Part II Income Distribution Deduction on a Minimum Tax Basis (continued)
43 Tentative income distribution deduction on a minimum tax basis. Subtract line 31 from line 37.
If zero or less, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . 43

f
44 Income distribution deduction on a minimum tax basis. Enter the smaller of line 42 or line 43.

o
Enter here and on line 26 . . . . . . . . . . . . . . . . . . . . . . . . . 44
Part III Alternative Minimum Tax

s
45 Exemption amount . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 $22,500 00
46 Enter the amount from line 29 . . . . . . . . . . . . . . 46

a 9
47 Phase-out of exemption amount . . . . . . . . . . . . . 47 $75,000 00

t
48 Subtract line 47 from line 46. If zero or less, enter -0- . . . . . . 48

f 0
49 Multiply line 48 by 25% (.25) . . . . . . . . . . . . . . . . . . . . . . . 49

0
50 Subtract line 49 from line 45. If zero or less, enter -0- . . . . . . . . . . . . . . . 50

a /2
51 Subtract line 50 from line 46 . . . . . . . . . . . . . . . . . . . . . . . 51

r
52 Go to Part IV of Schedule I to figure line 52 if the estate or trust has qualified dividends or has a

D /10
gain on lines 14a and 15 of column (2) of Schedule D (Form 1041) (as refigured for the AMT, if
necessary). Otherwise, if line 51 is—
● $175,000 or less, multiply line 51 by 26% (.26).
● Over $175,000, multiply line 51 by 28% (.28) and subtract $3,500 from the result . . . . . 52

9
53 Alternative minimum foreign tax credit (see page 7 of the instructions) . . . . . . . . . . 53

0
54 Tentative minimum tax. Subtract line 53 from line 52 . . . . . . . . . . . . . . . 54
55 Enter the tax from Form 1041, Schedule G, line 1a (minus any foreign tax credit from Schedule G, line 2a) 55
56 Alternative minimum tax. Subtract line 55 from line 54. If zero or less, enter -0-. Enter here and
on Form 1041, Schedule G, line 1c . . . . . . . . . . . . . . . . . . . . . 56
Part IV Line 52 Computation Using Maximum Capital Gains Rates
Caution: If you did not complete Part V of Schedule D (Form 1041), the Schedule D Tax Worksheet,
or the Qualified Dividends Tax Worksheet, see page 8 of the instructions before completing this part.
57 Enter the amount from line 51 . . . . . . . . . . . . . . . . . . . . . . . 57
58 Enter the amount from Schedule D (Form 1041), line 22, line 13 of the
Schedule D Tax Worksheet, or line 4 of the Qualified Dividends Tax
Worksheet, whichever applies (as refigured for the AMT, if necessary) 58
59 Enter the amount from Schedule D (Form 1041), line 14b, column (2)
(as refigured for the AMT, if necessary). If you did not complete
Schedule D for the regular tax or the AMT, enter -0- . . . . . . . 59
60 If you did not complete a Schedule D Tax Worksheet for the regular tax
or the AMT, enter the amount from line 58. Otherwise, add lines 58 and
59 and enter the smaller of that result or the amount from line 10 of the
Schedule D Tax Worksheet (as refigured for the AMT, if necessary) . . 60
61 Enter the smaller of line 57 or line 60 . . . . . . . . . . . . . . . . . . . . 61
62 Subtract line 61 from line 57 . . . . . . . . . . . . . . . . . . . . . . . 62
63 If line 62 is $175,000 or less, multiply line 62 by 26% (.26). Otherwise, multiply line 62 by 28%
(.28) and subtract $3,500 from the result . . . . . . . . . . . . . . . . . .  63
64 Maximum amount subject to the 0% rate . . . . . . . . . . 64 $2,300 00
65 Enter the amount from line 23 of Schedule D (Form 1041), line 14 of the
Schedule D Tax Worksheet, or line 5 of the Qualified Dividends Tax
Worksheet on page 27 of the Instructions for Form 1041, whichever
applies (as figured for the regular tax). If you did not complete
Schedule D or either worksheet for the regular tax, enter -0- . . . . 65
66 Subtract line 65 from line 64. If zero or less, enter -0- . . . . . . 66
67 Enter the smaller of line 57 or line 58 . . . . . . . . . . . 67
68 Enter the smaller of line 66 or line 67 . . . . . . . . . . . 68
69 Subtract line 68 from line 67 . . . . . . . . . . . . . . 69
70 Multiply line 69 by 15% (.15) . . . . . . . . . . . . . . . . . . . . . .  70
If line 59 is zero or blank, skip lines 71 and 72 and go to line 73. Otherwise, go to line 71.
71 Subtract line 67 from line 61 . . . . . . . . . . . . . . 71
72 Multiply line 71 by 25% (.25) . . . . . . . . . . . . . . . . . . . . . .  72
73 Add lines 63, 70, and 72 . . . . . . . . . . . . . . . . . . . . . . . . . 73
74 If line 57 is $175,000 or less, multiply line 57 by 26% (.26). Otherwise, multiply line 57 by 28%
(.28) and subtract $3,500 from the result . . . . . . . . . . . . . . . . . . . 74
75 Enter the smaller of line 73 or line 74 here and on line 52 . . . . . . . . . . . . . . 75
Schedule I (Form 1041) (2009)

1041_Prep_Book_10.indb 134 10/19/2009 10:14:16 AM

 INSTRUCTIONS FOR FORM 1041 135

2008 Department of the Treasury

Internal Revenue Service

Instructions for Form 1041

and Schedules A, B, G, J,
and K-1
U.S. Income Tax Return for Estates and Trusts
Section references are to the Internal Contents Page • The IRS is expected to release final
Revenue Code unless otherwise noted. G. Section 645 Election . . . . . . . . . . 17 regulations regarding costs paid to an
Contents Page Income . . . . . . . . . . . . . . . . . . . . . . 17 investment advisor by a nongrantor
What’s New . . . . . . . . . . . . . . . . . . . .1 Deductions . . . . . . . . . . . . . . . . . . . 18 trust or estate as generally being
Reminders . . . . . . . . . . . . . . . . . . . .1 Tax and Payments . . . . . . . . . . . . . 23 subject to the 2-percent floor for
Photographs of Missing Schedule A — Charitable miscellaneous itemized deductions (line
Children . . . . . . . . . . . . . . . . . . . . .2 Deduction . . . . . . . . . . . . . . . . . . 24 15b). Additionally, the IRS is expected
Unresolved Tax Issues . . . . . . . . . . .2 Schedule B — Income to address the issue raised when a
How To Get Forms and Distribution Deduction . . . . . . . . . 25 nongrantor trust or estate pays a
Publications . . . . . . . . . . . . . . . . . .2 Schedule G — Tax Bundled Fiduciary Fee for costs
General Instructions . . . . . . . . . . . .2 Computation . . . . . . . . . . . . . . . . 27 incurred in-house by the fiduciary,
Purpose of Form . . . . . . . . . . . . . . . .2 Other Information . . . . . . . . . . . . . . 29 some of which are subject to the
Income Taxation of Trusts and Schedule J (Form 1041) — 2-percent floor. These final Regulations
Decedents’ Estates . . . . . . . . . . . .2 Accumulation Distribution for under section 1.67-4 will be consistent
Abusive Trust Arrangements . . . . . . .3 Certain Complex Trusts . . . . . . . . 30 with the Supreme Court’s holding in
Definitions . . . . . . . . . . . . . . . . . . . . .3 Schedule K-1 (Form 1041) — Michael J. Knight, Trustee of William L.
Who Must File . . . . . . . . . . . . . . . . . .4 Beneficiary’s Share of Rudkin Testamentary Trust v.
Electronic Filing . . . . . . . . . . . . . . . . .6 Income, Deductions, Credits, Commissioner, 552 U.S. __ (2008), Slip
When To File . . . . . . . . . . . . . . . . . .7 etc. . . . . . . . . . . . . . . . . . . . . . . . 32 Op. 06-1286, 2008 -17 I.R.B. 828. Also,
Period Covered . . . . . . . . . . . . . . . . .7 Index . . . . . . . . . . . . . . . . . . . . . . . 37 the IRS has announced that the
Where To File . . . . . . . . . . . . . . . . . .7 unbundling of fees would not be
Who Must Sign . . . . . . . . . . . . . . . . .7 What’s New required for tax years beginning before
Accounting Methods . . . . . . . . . . . . .8 January 2009.
• For 2008, Schedule I will not appear • For tax years beginning in 2008, the
Accounting Periods . . . . . . . . . . . . . .8 on pages 3 and 4 of Form 1041.
Rounding Off to Whole Dollars . . . . .8 Instead, it will be a separate form titled requirement to file a return for a
Estimated Tax . . . . . . . . . . . . . . . . . .8 Schedule I (Form 1041), Alternative bankruptcy estate applies only if gross
Interest and Penalties . . . . . . . . . . . .9 Minimum Tax — Estates and Trusts income is at least $8,950.
Other Forms That May Be (AMT). The filing requirements remain • For 2008, qualified disability trusts
Required . . . . . . . . . . . . . . . . . . . .9 the same for Schedule I as in previous can claim an exemption of up to
Additional Information . . . . . . . . . . . 11 years. If you have to prepare a $3,500. A trust with modified adjusted
Assembly and Attachments . . . . . . . 11 Schedule I (Form 1041), be sure to gross income above $159,950 loses
Special Reporting include it immediately after the Form part of the exemption deduction. See
Instructions . . . . . . . . . . . . . . . . 11 1041. See Assembly and Attachments the instructions for line 20 on page 23
Grantor Type Trusts . . . . . . . . . . . 11 for information about the correct for more details. In addition, the 2008
Pooled Income Funds . . . . . . . . . 12 assembly of the return. reduction of the phaseout of the
Electing Small Business • For 2008, the Instructions for exemption for qualified disability trusts
Trusts . . . . . . . . . . . . . . . . . . . . 12 Schedule D and the Instructions for is only 1/2 the amount of the reduction
Bankruptcy Estates. . . . . . . . . . . . 13 Schedule I will be separate products that otherwise would have applied for
Specific Instructions . . . . . . . . . . . 14 and will no longer be included in the 2007.
Name of Estate or Trust . . . . . . . . . . 14 Instructions for Form 1041.
Name and Title of Fiduciary . . . . . . . 15 • For Form 1041 filers, the automatic
Address . . . . . . . . . . . . . . . . . . . . . 15
extension of time to file is now 5 Reminders
months. To apply for an automatic
A. Type of Entity . . . . . . . . . . . . . . . 15 extension of time to file, use Form
• Review a copy of the trust instrument
B. Number of Schedules K-1 7004, Application for Automatic (including any amendments) or the will,
Attached . . . . . . . . . . . . . . . . . . . 15 Extension of Time To File Certain if any, before preparing an estate’s or
C. Employer Identification Business Income Tax, Information, and trust’s return.
Number . . . . . . . . . . . . . . . . . . . . 16 Other Returns. • Include farm rental income and
D. Date Entity Created . . . . . . . . . . . 16 • The estate and trust deduction for expenses based on crops or livestock
E. Nonexempt Charitable and sales taxes, set to expire at the end of produced by a tenant on line 5 and not
Split-Interest Trusts . . . . . . . . . . . 16 2007, was extended through December on line 6 of Form 1041. Report the
F. Initial Return, Amended 31, 2009, by the Emergency Economic income and expenses on Part I of
Return, etc. . . . . . . . . . . . . . . . . . 16 Stabilization Act of 2008. Schedule E (Form 1040).

Cat. No. 11372D

1041_Prep_Book_10.indb 135 10/19/2009 10:14:17 AM

 136 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
Photographs of Missing
Children
The Internal Revenue Service is a
proud partner with the National Center
for Missing and Exploited Children.
Photographs of missing children
selected by the Center may appear in
instructions on pages that would
otherwise be blank. You can help bring
these children home by looking at the
photographs and calling
1-800-THE-LOST (1-800-843-5678) if
you recognize a child.
Unresolved Tax Issues
If you have attempted to deal with an
IRS problem unsuccessfully, you
should contact the Taxpayer Advocate.
The Taxpayer Advocate independently
represents the estate’s or trust’s
interests and concerns within the IRS
by protecting its rights and resolving
problems that have not been fixed
through normal channels.
While Taxpayer Advocates cannot
change the tax law or make a technical
tax decision, they can clear up
problems that resulted from previous
contacts and ensure that the estate’s or
trust’s case is given a complete and
impartial review.
The estate’s or trust’s assigned
personal advocate will listen to its point
of view and will work with the estate or
trust to address its concerns. The
estate or trust can expect the advocate
to provide:
• An impartial and independent look at
your problem,
• Timely acknowledgment,
• The name and phone number of the
individual assigned to its case,
• Updates on progress,
• Timeframes for action,
• Speedy resolution, and
• Courteous service.
When contacting the Taxpayer
Advocate, you should provide the
following information.
• The estate’s or trust’s name,
address, and employer identification
number (EIN).
• The name and telephone number of
an authorized contact person and the
hours he or she can be reached.
• The type of tax return and year(s)
involved.
• A detailed description of the problem.
• Previous attempts to solve the
problem and the office that had been
contacted.
• A description of the hardship the
estate or trust is facing and supporting
documentation (if applicable).
You can contact a Taxpayer
Advocate as follows:
• Call the Taxpayer Advocate’s toll-free
number: 1-877-777-4778
1041_Prep_Book_10.indb 136
• Call, write, or fax the Taxpayer
Advocate office in its area (see Pub.
1546, Taxpayer Advocate Service, Your
Voice At The IRS, for addresses and
phone numbers).
• TTY/TDD help is available by calling
1-800-829-4059.
• Visit the website at www.irs.gov/
advocate.
How To Get Forms and
Publications
Internet. You can access the IRS
website 24 hours a day, 7 days a week
at www.irs.gov to:
• Download forms, instructions, and
publications;
• Order IRS products online;
• Research your tax questions online;
• Search publications online by topic or
keyword;
• View Internal Revenue Bulletins
(IRBs) published in the last few years;
and
• Sign up to receive local and national
tax news by email.
DVD for tax products. You can order
Pub. 1796, IRS Tax Products DVD, and
obtain:
• Current-year forms, instructions, and
publications.
• Prior-year forms, instructions, and
publications.
• Tax Map: an electronic research tool
and finding aid.
• Tax Law frequently asked questions.
• Tax Topics from the IRS telephone
response system.
• Internal Revenue Code - Title 26.
• Fill-in, print, and save features for
most tax forms.
• Internal Revenue Bulletins.
• Toll-free and email technical support.
The DVD is released twice during the
year.
— The first release will ship the
beginning of January 2009.
— The final release will ship the
beginning of March 2009.
Purchase the DVD from National
Technical Information Service at
www.irs.gov/cdorders for $30 (no
handling fee) or call 1-877-233-6767 toll
free to buy the DVD for $30 (plus a $6
handling fee). The price is discounted
to $25 for orders placed prior to
December 1, 2008.
By phone and in person. You can
order forms and publications by calling
1-800-TAX-FORM (1-800-829-3676).
You can also get most forms and
publications at your local IRS office.
-2-
General Instructions
Purpose of Form
The fiduciary of a domestic decedent’s
estate, trust, or bankruptcy estate uses
Form 1041 to report:
• The income, deductions, gains,
losses, etc. of the estate or trust;
• The income that is either
accumulated or held for future
distribution or distributed currently to
the beneficiaries;
• Any income tax liability of the estate
or trust; and
• Employment taxes on wages paid to
household employees.
Income Taxation of
Trusts and Decedents’
Estates
A trust (except a grantor type trust) or a
decedent’s estate is a separate legal
entity for federal tax purposes. A
decedent’s estate comes into existence
at the time of death of an individual. A
trust may be created during an
individual’s life (inter vivos) or at the
time of his or her death under a will
(testamentary). If the trust instrument
contains certain provisions, then the
person creating the trust (the grantor) is
treated as the owner of the trust’s
assets. Such a trust is a grantor type
trust. See page 11 for special rules for
grantor trusts.
A trust or decedent’s estate figures
its gross income in much the same
manner as an individual. Most
deductions and credits allowed to
individuals are also allowed to estates
and trusts. However, there is one major
distinction. A trust or decedent’s estate
is allowed an income distribution
deduction for distributions to
beneficiaries. To figure this deduction,
the fiduciary must complete Schedule
B. The income distribution deduction
determines the amount of any
distributions taxed to the beneficiaries.
For this reason, a trust or decedent’s
estate sometimes is referred to as a
“pass-through” entity. The beneficiary,
and not the trust or decedent’s estate,
pays income tax on his or her
distributive share of income. Schedule
K-1 (Form 1041) is used to notify the
beneficiaries of the amounts to be
included on their income tax returns.
Before preparing Form 1041, the
fiduciary must figure the accounting
income of the estate or trust under the
will or trust instrument and applicable
local law to determine the amount, if
any, of income that is required to be
distributed, because the income
distribution deduction is based, in part,
on that amount.
10/19/2009 10:14:17 AM

Abusive Trust
Arrangements
Certain trust arrangements purport to
reduce or eliminate federal taxes in
ways that are not permitted under the
law. Abusive trust arrangements
typically are promoted by the promise
of tax benefits with no meaningful
change in the taxpayer’s control over or
benefit from the taxpayer’s income or
assets. The promised benefits may
include reduction or elimination of
income subject to tax; deductions for
personal expenses paid by the trust;
depreciation deductions of an owner’s
personal residence and furnishings; a
stepped-up basis for property
transferred to the trust; the reduction or
elimination of self-employment taxes;
and the reduction or elimination of gift
and estate taxes. These promised
benefits are inconsistent with the tax
rules applicable to trust arrangements.
Abusive trust arrangements often
use trusts to hide the true ownership of
assets and income or to disguise the
substance of transactions. These
arrangements frequently involve more
than one trust, each holding different
assets of the taxpayer (for example, the
taxpayer’s business, business
equipment, home, automobile, etc.).
Some trusts may hold interests in other
trusts, purport to involve charities, or
are foreign trusts. Funds may flow from
one trust to another trust by way of
rental agreements, fees for services,
purchase agreements, and
distributions.
Some of the abusive trust
arrangements that have been identified
include unincorporated business trusts
(or organizations), equipment or service
trusts, family residence trusts,
charitable trusts, and final trusts. In
each of these trusts, the original owner
of the assets that are nominally subject
to the trust effectively retains the
authority to cause financial benefits of
the trust to be directly or indirectly
returned or made available to the
owner. For example, the trustee may be
the promoter, or a relative or friend of
the owner who simply carries out the
directions of the owner whether or not
permitted by the terms of the trust.
When trusts are used for legitimate
business, family, or estate planning
purposes, either the trust, the
beneficiary, or the transferor to the trust
will pay the tax on income generated by
the trust property. Trusts cannot be
used to transform a taxpayer’s
personal, living, or educational
expenses into deductible items, and
cannot seek to avoid tax liability by
ignoring either the true ownership of
income and assets or the true
substance of transactions. Therefore,
1041_Prep_Book_10.indb 137
the tax results promised by the
promoters of abusive trust
arrangements are not allowable under
the law, and the participants in and
promoters of these arrangements may
be subject to civil or criminal penalties
in appropriate cases.
For more details, including the legal
principles that control the proper tax
treatment of these abusive trust
arrangements, see Notice 97-24,
1997-1 C.B. 409.
For additional information about
abusive tax arrangements, visit the IRS
website at www.irs.gov and type in the
keyword “Scams” in the search box.
Definitions
Beneficiary
A beneficiary includes an heir, a
legatee, or a devisee.
Decedent’s Estate
The decedent’s estate is an entity that
is formed at the time of an individual’s
death and generally is charged with
gathering the decedent’s assets, paying
the decedent’s debts and expenses,
and distributing the remaining assets.
Generally, the estate consists of all the
property, real or personal, tangible or
intangible, wherever situated, that the
decedent owned an interest in at death.
Distributable Net Income
(DNI)
The income distribution deduction
allowable to estates and trusts for
amounts paid, credited, or required to
be distributed to beneficiaries is limited
to DNI. This amount, which is figured
on Schedule B, line 7, is also used to
determine how much of an amount
paid, credited, or required to be
distributed to a beneficiary will be
includible in his or her gross income.
Income, Deductions, and
Credits in Respect of a
Decedent (IRD)
Income. When completing Form 1041,
you must take into account any items
that are IRD.
In general, IRD is income that a
decedent was entitled to receive but
that was not properly includible in the
decedent’s final income tax return
under the decedent’s method of
accounting.
IRD includes:
• All accrued income of a decedent
who reported his or her income on the
cash method of accounting,
• Income accrued solely because of
the decedent’s death in the case of a
decedent who reported his or her
-3-
INSTRUCTIONS FOR FORM 1041 137
income on the accrual method of
accounting, and
• Income to which the decedent had a
contingent claim at the time of his or
her death.
Some examples of IRD for a
decedent who kept his or her books on
the cash method are:
• Deferred salary payments that are
payable to the decedent’s estate,
• Uncollected interest on U.S. savings
bonds,
• Proceeds from the completed sale of
farm produce, and
• The portion of a lump-sum
distribution to the beneficiary of a
decedent’s IRA that equals the balance
in the IRA at the time of the owner’s
death. This includes unrealized
appreciation and income accrued to
that date, less the aggregate amount of
the owner’s nondeductible contributions
to the IRA. Such amounts are included
in the beneficiary’s gross income in the
tax year that the distribution is received.
The IRD has the same character it
would have had if the decedent had
lived and received such amount.
Deductions and credits. The
following deductions and credits, when
paid by the decedent’s estate, are
allowed on Form 1041 even though
they were not allowable on the
decedent’s final income tax return.
• Business expenses deductible under
section 162.
• Interest deductible under section
163.
• Taxes deductible under section 164.
• Investment expenses described in
section 212 (in excess of 2% of
adjusted gross income (AGI)).
• Percentage depletion allowed under
section 611.
• Foreign tax credit.
For more information, see section
691 or IRD in Pub. 559, Survivors,
Executors, and Administrators.
Income Required To Be
Distributed Currently
Income required to be distributed
currently is income that is required
under the terms of the governing
instrument and applicable local law to
be distributed in the year it is received.
The fiduciary must be under a duty to
distribute the income currently, even if
the actual distribution is not made until
after the close of the trust’s tax year.
See Regulations section 1.651(a)-2.
Fiduciary
A fiduciary is a trustee of a trust, or an
executor, executrix, administrator,
administratrix, personal representative,
or person in possession of property of a
decedent’s estate.
10/19/2009 10:14:18 AM
 138 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
Note. Any reference in these
instructions to “you” means the fiduciary
of the estate or trust.
Trust
A trust is an arrangement created either
by a will or by an inter vivos declaration
by which trustees take title to property
for the purpose of protecting or
conserving it for the beneficiaries under
the ordinary rules applied in chancery
or probate courts.
Revocable Living Trust
A revocable living trust is an
arrangement created by a written
agreement or declaration during the life
of an individual and can be changed or
ended at any time during the
individual’s life. A revocable living trust
is generally created to manage and
distribute property. Many people use
this type of trust instead of (or in
addition to) a will.
Because this type of trust is
revocable, it is treated as a grantor type
trust for tax purposes. See Grantor
Type Trusts later for special filing
instructions that apply to grantor type
trusts.
Be sure to read Optional Filing
TIP Methods for Certain Grantor
Type Trusts. Generally, most
people that have revocable living trusts
will be able to use Optional Method 1.
This method is the easiest and least
burdensome way to meet your
obligations.
Who Must File
Decedent’s Estate
The fiduciary (or one of the joint
fiduciaries) must file Form 1041 for a
domestic estate that has:
1. Gross income for the tax year of
$600 or more, or
2. A beneficiary who is a
nonresident alien.
An estate is a domestic estate if it is
not a foreign estate. A foreign estate is
one the income of which is from
sources outside the United States that
is not effectively connected with the
conduct of a U.S. trade or business and
is not includible in gross income. If you
are the fiduciary of a foreign estate, file
Form 1040NR, U.S. Nonresident Alien
Income Tax Return, instead of Form
1041.
Trust
The fiduciary (or one of the joint
fiduciaries) must file Form 1041 for a
domestic trust taxable under section
641 that has:
1. Any taxable income for the tax
year,
1041_Prep_Book_10.indb 138
2. Gross income of $600 or more
(regardless of taxable income), or
3. A beneficiary who is a
nonresident alien.
Two or more trusts are treated as
one trust if such trusts have
substantially the same grantor(s) and
substantially the same primary
beneficiary(ies) and a principal purpose
of such trusts is avoidance of tax. This
provision applies only to that portion of
the trust that is attributable to
contributions to corpus made after
March 1, 1984.
A trust is a domestic trust if:
• A U.S. court is able to exercise
primary supervision over the
administration of the trust (court test),
and
• One or more U.S. persons have the
authority to control all substantial
decisions of the trust (control test).
See Regulations section 301.7701-7
for more information on the court and
control tests.
Also treated as a domestic trust is a
trust (other than a trust treated as
wholly owned by the grantor) that:
• Was in existence on August 20,
1996,
• Was treated as a domestic trust on
August 19, 1996, and
• Elected to continue to be treated as a
domestic trust.
A trust that is not a domestic trust is
treated as a foreign trust. If you are the
trustee of a foreign trust, file Form
1040NR instead of Form 1041. Also, a
foreign trust with a U.S. owner
generally must file Form 3520-A,
Annual Information Return of Foreign
Trust With a U.S. Owner.
If a domestic trust becomes a foreign
trust, it is treated under section 684 as
having transferred all of its assets to a
foreign trust, except to the extent a
grantor or another person is treated as
the owner of the trust when the trust
becomes a foreign trust.
Special Rule for Certain
Revocable Trusts
Section 645 provides that if both the
executor (if any) of an estate (the
related estate) and the trustee of a
qualified revocable trust (QRT) elect the
treatment in section 645, the trust must
be treated and taxed as part of the
related estate during the election
period. This election may be made by a
QRT even if no executor is appointed
for the related estate.
In general, Form 8855, Election To
Treat a Qualified Revocable Trust as
Part of an Estate, must be filed by the
due date for Form 1041 for the first tax
year of the related estate. This applies
even if the combined related estate and
-4-
electing trust do not have sufficient
income to be required to file Form
1041. However, if the estate is granted
an extension of time to file Form 1041
for its first tax year, the due date for
Form 8855 is the extended due date.
Once made, the election is
irrevocable.
Qualified revocable trusts. In
general, a QRT is any trust (or part of a
trust) that, on the day the decedent
died, was treated as owned by the
decedent because the decedent held
the power to revoke the trust as
described in section 676. An electing
trust is a QRT for which a section 645
election has been made.
Election period. The election period
is the period of time during which an
electing trust is treated as part of its
related estate.
The election period begins on the
date of the decedent’s death and
terminates on the earlier of:
• The day on which the electing trust
and related estate, if any, distribute all
of their assets, or
• The day before the applicable date.
To determine the applicable date, first
determine whether a Form 706, United
States Estate (and Generation-Skipping
Transfer) Tax Return, is required to be
filed as a result of the decedent’s
death. If no Form 706 is required to be
filed, the applicable date is 2 years after
the date of the decedent’s death. If
Form 706 is required, the applicable
date is the later of 2 years after the
date of the decedent’s death or 6
months after the final determination of
liability for estate tax. For additional
information, see Regulations section
1.645-1(f).
Taxpayer identification number (TIN).
All QRTs must obtain a new TIN
following the death of the decedent
whether or not a section 645 election is
made. (Use Form W-9, Request for
Taxpayer Identification Number and
Certification, to notify payers of the new
TIN.)
An electing trust that continues after
the termination of the election period
does not need to obtain a new TIN
following the termination unless:
• An executor was appointed and
agreed to the election after the electing
trust made a valid section 645 election,
and the electing trust had filed a return
as an estate under the trust’s TIN, or
• No executor was appointed and the
QRT was the filing trust (as explained
later).
A related estate that continues after
the termination of the election period
does not need to obtain a new TIN.
For more information about TINs,
including trusts with multiple owners,
10/19/2009 10:14:18 AM

see Regulations sections 1.645-1 and
301.6109-1(a).
General procedures for completing
Form 1041 during the election
period.
If there is an executor. The
following rules apply to filing Form 1041
while the election is in effect.
• The executor of the related estate is
responsible for filing Form 1041 for the
estate and all electing trusts. The return
is filed under the name and TIN of the
related estate. Be sure to check the
Decedent’s estate box at the top of
Form 1041. The executor continues to
file Form 1041 during the election
period even if the estate distributes all
of its assets before the end of the
election period.
• The Form 1041 includes all items of
income, deduction, and credit for the
estate and all electing trusts.
• The executor must attach a
statement to Form 1041 providing the
following information for each electing
trust: (a) the name of the electing trust,
(b) the TIN of the electing trust, and (c)
the name and address of the trustee of
the electing trust.
• The related estate and the electing
trust are treated as separate shares for
purposes of computing DNI and
applying distribution provisions. Also,
each of those shares can contain two
or more separate shares. For more
information, see Separate share rule on
page 25 and Regulations section
1.645-1(e)(2)(iii).
• The executor is responsible for
insuring that the estate’s share of the
combined tax obligation is paid.
For additional information, including
treatment of transfers between shares
and charitable contribution deductions,
see Regulations section 1.645-1(e).
If there is no executor. If no
executor has been appointed for the
related estate, the trustee of the
electing trust files Form 1041 as if it
was an estate. File using the TIN that
the QRT obtained after the death of the
decedent. The trustee can choose a
fiscal year as the trust’s tax year during
the election period. Be sure to check
the Decedent’s estate box at the top of
page 1 during the election period. The
electing trust is entitled to a single $600
personal exemption on returns filed for
the election period.
If there is more than one electing
trust, the trusts must appoint one
trustee as the filing trustee. Form 1041
is filed under the name and TIN of the
filing trustee’s trust. A statement
providing the same information
regarding the electing trusts (except the
filing trust) that is listed under If there is
an executor above must be attached to
these Forms 1041. All electing trusts
must choose the same tax year.
1041_Prep_Book_10.indb 139
If there is more than one electing
trust, the filing trustee is responsible for
ensuring that the filing trust’s share of
the combined tax liability is paid.
For additional information on filing
requirements when there is no
executor, including application of the
separate share rule, see Regulations
section 1.645-1(e). For information on
the requirements when an executor is
appointed after an election is made and
the executor does not agree to the
election, see below.
Responsibilities of the trustee
when there is an executor (or there
is no executor and the trustee is not
the filing trustee). When there is an
executor (or there is no executor and
the trustee is not the filing trustee), the
trustee of an electing trust is
responsible for the following during the
election period.
• To timely provide the executor with
all the trust information necessary to
allow the executor to file a complete,
accurate, and timely Form 1041.
• To ensure that the electing trust’s
share of the combined tax liability is
paid.
The trustee does not file a Form
1041 during the election period (except
for a final return if the trust terminates
during the election period as explained
later).
Procedures for completing Form
1041 for the year in which the
election terminates.
If there is an executor. If there is
an executor, the Form 1041 filed under
the name and TIN of the related estate
for the tax year in which the election
terminates includes (a) the items of
income, deduction, and credit for the
related estate for its entire tax year, and
(b) the income, deductions, and credits
for the electing trust for the period that
ends with the last day of the election
period. If the estate will not continue
after the close of the tax year, indicate
that this Form 1041 is a final return.
At the end of the last day of the
election period, the combined entity is
deemed to distribute the share
comprising the electing trust to a new
trust. All items of income, including net
capital gains, that are attributable to the
share comprising the electing trust are
included in the calculation of DNI of the
electing trust and treated as distributed.
The distribution rules of sections 661
and 662 apply to this deemed
distribution. The combined entity is
entitled to an income distribution
deduction for this deemed distribution,
and the ‘‘new’’ trust must include its
share of the distribution in its income.
See Regulations sections
1.645-1(e)(2)(iii) and 1.645-1(h) for
more information.
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INSTRUCTIONS FOR FORM 1041 139
If the electing trust continues in
existence after the termination of the
election period, the trustee must file
Form 1041 under the name and TIN of
the trust, using the calendar year as its
accounting period, if it is otherwise
required to file.
If there is no executor. If there is
no executor, the following rules apply to
filing Form 1041 for the tax year in
which the election period ends.
• The tax year of the electing trust
closes on the last day of the election
period, and the Form 1041 filed for that
tax year includes all items of income,
deduction, and credit for the electing
trust for the period beginning with the
first day of the tax year and ending with
the last day of the election period.
• The deemed distribution rules
discussed above apply.
• Check the box to indicate that this
Form 1041 is a final return.
• If the filing trust continues after the
termination of the election period, the
trustee must obtain a new TIN. If the
trust meets the filing requirements, the
trustee must file a Form 1041 under the
new TIN for the period beginning with
the day after the close of the election
period and, in general, ending
December 31 of that year.
Responsibilities of the trustee
when there is an executor (or there
is no executor and the trustee is not
the filing trustee). In addition to the
requirements listed above under this
same heading, the trustee is
responsible for the following.
• If the trust will not continue after the
close of the election period, the trustee
must file a Form 1041 under the name
and TIN of the trust. Complete the
entity information and items A, C, D,
and F. Indicate in item F that this is a
final return. Do not report any items of
income, deduction, or credit.
• If the trust will continue after the
close of the election period, the trustee
must file a Form 1041 for the trust for
the tax year beginning the day after the
close of the election period and, in
general, ending December 31 of that
year. Use the TIN obtained after the
decedent’s death. Follow the general
rules for completing the return.
Special filing instructions.
When the election is not made by
the due date of the QRT’s Form 1041.
If the section 645 election has not been
made by the time the QRT’s first
income tax return would be due for the
tax year beginning with the decedent’s
death, but the trustee and executor (if
any) have decided to make a section
645 election, then the QRT is not
required to file a Form 1041 for the
short tax year beginning with the
decedent’s death and ending on
December 31 of that year. However, if
10/19/2009 10:14:19 AM
 140 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
a valid election is not subsequently
made, the QRT may be subject to
penalties and interest for failure to file
and failure to pay.
If the QRT files a Form 1041 for this
short period, and a valid section 645
election is subsequently made, then the
trustee must file an amended Form
1041 for the electing trust, excluding all
items of income, deduction, and credit
of the electing trust. These amounts are
then included on the first Form 1041
filed by the executor for the related
estate (or the filing trustee for the
electing trust filing as an estate).
Later appointed executor. If an
executor for the related estate is not
appointed until after the trustee has
made a valid section 645 election, the
executor must agree to the trustee’s
election and they must file a revised
Form 8855 within 90 days of the
appointment of the executor. If the
executor does not agree to the election,
the election terminates as of the date of
appointment of the executor.
If the executor agrees to the
election, the trustee must amend any
Form 1041 filed under the name and
TIN of the electing trust for the period
beginning with the decedent’s death.
The amended returns are still filed
under the name and TIN of the electing
trust, and they must include the items
of income, deduction, and credit for the
related estate for the periods covered
by the returns. Also, attach a statement
to the amended Forms 1041 identifying
the name and TIN of the related estate,
and the name and address of the
executor. Check the Final return box on
the amended return for the tax year that
ends with the appointment of the
executor. Except for this amended
return, all returns filed for the combined
entity after the appointment of the
executor must be filed under the name
and TIN of the related estate.
If the election terminates as the
result of a later appointed executor, the
executor of the related estate must file
Forms 1041 under the name and TIN of
the related estate for all tax years of the
related estate beginning with the
decedent’s death. The electing trust’s
election period and tax year terminate
the day before the appointment of the
executor. The trustee is not required to
amend any of the returns filed by the
electing trust for the period prior to the
appointment of the executor. The trust
must file a final Form 1041 following the
instructions above for completing Form
1041 in the year in which the election
terminates and there is no executor.
Termination of the trust during the
election period. If an electing trust
terminates during the election period,
the trustee of that trust must file a final
Form 1041 by completing the entity
1041_Prep_Book_10.indb 140
information (using the trust’s EIN),
checking the Final return box, and
signing and dating the form. Do not
report items of income, deduction, and
credit. These items are reported on the
related estate’s return.
Alaska Native Settlement
Trusts
The trustee of an Alaska Native
Settlement Trust may elect the special
tax treatment for the trust and its
beneficiaries provided for in section
646. The election must be made by the
due date (including extensions) for filing
the trust’s tax return for its first tax year
ending after June 7, 2001. Do not use
Form 1041. Use Form 1041-N, U.S.
Income Tax Return for Electing Alaska
Native Settlement Trusts, to make the
election. Additionally, Form 1041-N is
the trust’s income tax return and
satisfies the section 6039H information
reporting requirement for the trust.
Bankruptcy Estate
The bankruptcy trustee or debtor-in-
possession must file Form 1041 for the
estate of an individual involved in
bankruptcy proceedings under chapter
7 or 11 of title 11 of the United States
Code if the estate has gross income for
the tax year of $8,950 or more. See
Bankruptcy Estates on page 13 for
details.
Common Trust Funds
Do not file Form 1041 for a common
trust fund maintained by a bank.
Instead, the fund may use Form 1065,
U.S. Return of Partnership Income, for
its return. For more details, see section
584 and Regulations section 1.6032-1.
Qualified Settlement Funds
The trustee of a designated or qualified
settlement fund (QSF) generally must
file Form 1120-SF, U.S. Income Tax
Return for Settlement Funds, instead of
Form 1041.
Special election. If a QSF has only
one transferor, the transferor may elect
to treat the QSF as a grantor type trust.
To make the grantor trust election,
the transferor must attach an election
statement to a timely filed Form 1041,
including extensions, that the
administrator files for the QSF for the
tax year in which the settlement fund is
established. If Form 1041 is not filed
because Optional Method 1 or 2 was
chosen, attach the election statement
to a timely filed income tax return,
including extensions, of the transferor
for the tax year in which the settlement
fund is established.
Transition rule. A transferor can
make a grantor trust election for a QSF
that was established by February 3,
2006, if the applicable period for filing
-6-
an amended return has not expired for
both the QSF’s first tax year and all
later tax years and the same tax years
of the transferor. A grantor trust
election under this paragraph requires
that the returns of the QSF and the
transferor for all affected tax years are
consistent with the grantor trust
election. This requirement may be
satisfied by timely filed original returns
or amended returns filed before the
applicable period of limitations expires.
For information about QSFs established
by the U.S. government by February 3,
2006, see Regulations section
1.468B-5(c)(3).
Election statement. The election
statement may be made separately or,
if filed with Form 1041, on the
attachment described under Grantor
Type Trusts. At the top of the election
statement, write “Section 1.468B-1(k)
Election” and include the transferor’s:
• Name,
• Address,
• TIN, and
• A statement that he or she will treat
the qualified settlement fund as a
grantor type trust.
Widely Held Fixed
Investment Trust (WHFITs)
Trustees and middlemen of WHFITs do
not file Form 1041. Instead, they report
all items of gross income and proceeds
on the appropriate Form 1099. For the
definition of a WHFIT, see Regulations
section 1.671-5(b)(22). A tax
information statement that includes the
information given to the IRS on Forms
1099, as well as additional information
identified in Regulations section
1.671-5(e) must be given to trust
interest holders. See the General
Instructions for Forms 1099, 1098,
5498, and W-2G for more information.
Charitable Remainder Trusts
A section 664 charitable remainder trust
(CRT) does not file Form 1041. Instead,
a CRT files Form 5227, Split-Interest
Trust Information Return. If the CRT
has any unrelated business taxable
income, it also must file Form 4720,
Return of Certain Excise Taxes Under
Chapters 41 and 42 of the Internal
Revenue Code.
Electronic Filing
Qualified fiduciaries or transmitters may
be able to file Form 1041 and related
schedules electronically. If you wish to
do this, you must file Form 8633,
Application to Participate in the IRS
e-file Program. If you file Form 1041
electronically, you may now sign the
return electronically by using a personal
identification number (PIN). See Form
8879-F, IRS e-file Signature
Authorization for Form 1041, for details.
10/19/2009 10:14:19 AM
 INSTRUCTIONS FOR FORM 1041 141

If you do not sign the electronically filed on June 30, 2009, must file Form 1041 The private delivery service can tell
return by using a PIN, you must file by October 15, 2009. If the due date you how to get written proof of the
Form 8453-F, U.S. Estate or Trust falls on a Saturday, Sunday, or legal mailing date.
Income Tax Declaration and Signature holiday, file on the next business day.
for Electronic Filing. Extension of Time To File
For more details, get Pub. 1437, If more time is needed to file the estate
Procedures for the 1041 e-file Program,
Private Delivery Services or trust return, use Form 7004 to apply
U.S. Income Tax Returns For Estates You can use certain private delivery for an automatic 5-month extension of
and Trusts For Tax Year 2008 and Pub. services designated by the IRS to meet time to file.
1438, FILE SPECIFICATIONS, the “timely mailing as timely filing/
VALIDATION CRITERIA AND paying” rule for tax returns and Period Covered
RECORD LAYOUTS FOR THE payments. These private delivery File the 2008 return for calendar year
ELECTRONIC FILING PROGRAM services include only the following. 2008 and fiscal years beginning in 2008
FOR FORM 1041, U.S. INCOME TAX • DHL Worldwide Express (DHL): DHL and ending in 2009. If the return is for a
RETURN FOR ESTATES AND Same Day Service, DHL Next Day fiscal year or a short tax year (less than
TRUSTS FOR TAX YEAR 2008. If 10:30 am, DHL Next Day 12:00 pm, 12 months), fill in the tax year space at
Form 1041 is e-filed and there is a DHL Next Day 3:00 pm, and DHL 2nd the top of the form.
balance due, the fiduciary may
Day Service. The 2008 Form 1041 may also be
authorize an electronic funds
withdrawal with the return. • Federal Express (FedEx): FedEx used for a tax year beginning in 2009 if:
Priority Overnight, FedEx Standard 1. The estate or trust has a tax year
When To File Overnight, FedEx 2Day, FedEx of less than 12 months that begins and
International Priority, and FedEx ends in 2009, and
For calendar year estates and trusts, International First. 2. The 2009 Form 1041 is not
file Form 1041 and Schedule(s) K-1 on
or before April 15, 2009. For fiscal year • United Parcel Service (UPS): UPS available by the time the estate or trust
Next Day Air, UPS Next Day Air Saver, is required to file its tax return.
estates and trusts, file Form 1041 by However, the estate or trust must show
the 15th day of the 4th month following UPS 2nd Day Air, UPS 2nd Day Air
its 2009 tax year on the 2008 Form
the close of the tax year. For example, A.M., UPS Worldwide Express Plus, 1041 and incorporate any tax law
an estate that has a tax year that ends and UPS Worldwide Express. changes that are effective for tax years
beginning after December 31, 2008.
Where To File
For all estates and trusts, including charitable and split-interest trusts (other than Charitable Who Must Sign
Remainder Trusts).
Fiduciary
THEN use this address if you:
The fiduciary, or an authorized
IF you are located in Are not enclosing a check or Are enclosing a check or money representative, must sign Form 1041. If
... money order ... order ... there are joint fiduciaries, only one is
Connecticut, Delaware,
required to sign the return.
District of Columbia, A financial institution that submitted
Georgia, Illinois, estimated tax payments for trusts for
Indiana, Kentucky, which it is the trustee must enter its EIN
Maine, Maryland,
in the space provided for the EIN of the
Massachusetts,
Michigan, New Department of the Treasury Department of the Treasury fiduciary. Do not enter the EIN of the
Hampshire, New Internal Revenue Service Center Internal Revenue Service Center trust. For this purpose, a financial
Jersey, New York, Cincinnati, Ohio 45999-0048 Cincinnati, Ohio 45999-0148 institution is one that maintains a
North Carolina, Ohio, Treasury Tax and Loan (TT&L)
Pennsylvania, Rhode account. If you are an attorney or other
Island, South Carolina, individual functioning in a fiduciary
Tennessee, Vermont, capacity, leave this space blank. Do not
Virginia, West Virginia, enter your individual social security
Wisconsin
number (SSN).
Alabama, Alaska, If you, as fiduciary, fill in Form 1041,
Arizona, Arkansas,
California, Colorado,
leave the Paid Preparer’s space blank.
Florida, Hawaii, Idaho, If someone prepares this return and
Iowa, Kansas, does not charge you, that person
Louisiana, Minnesota, should not sign the return.
Department of the Treasury Department of the Treasury
Mississippi, Missouri,
Internal Revenue Service Center Internal Revenue Service Center
Montana, Nebraska,
Ogden, Utah 84201-0048 Ogden, Utah 84201-0148
Paid Preparer
Nevada, New Mexico, Generally, anyone who is paid to
North Dakota,
Oklahoma, Oregon,
prepare a tax return must sign the
South Dakota, Texas, return and fill in the other blanks in the
Utah, Washington, Paid Preparer’s Use Only area of the
Wyoming return.
A foreign country or Internal Revenue Service Center Internal Revenue Service Center The person required to sign the
United States P.O. Box 409101 P.O. Box 409101 return must:
possession Ogden, Utah 84409 Ogden, Utah 84409 • Complete the required preparer
information,
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1041_Prep_Book_10.indb 141 10/19/2009 10:14:19 AM

 142 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
• Sign it in the space provided for the
preparer’s signature (a facsimile
signature is acceptable), and
• Give you a copy of the return for your
records.
Paid Preparer Authorization
If the fiduciary wants to allow the IRS to
discuss the estate’s or trust’s 2008 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 estate’s or trust’s return. It does
not apply to the firm, if any, shown in
that section.
If the “Yes” box is checked, the
fiduciary is authorizing the IRS to call
the paid preparer to answer any
questions that may arise during the
processing of the estate’s or trust’s
return. The fiduciary is also authorizing
the paid preparer to:
• Give the IRS any information that is
missing from the estate’s or trust’s
return,
• Call the IRS for information about the
processing of the estate’s or trust’s
return or the status of its refund or
payment(s), and
• Respond to certain IRS notices that
the fiduciary has shared with the
preparer about math errors, offsets, and
return preparation. The notices will not
be sent to the preparer.
The fiduciary is not authorizing the
paid preparer to receive any refund
check, bind the estate or trust to
anything (including any additional tax
liability), or otherwise represent the
estate or trust before the IRS.
The authorization will automatically
end no later than the due date (without
regard to extensions) for filing the
estate’s or trust’s 2009 tax return. If the
fiduciary wants to expand the paid
preparer’s authorization or revoke the
authorization before it ends, see Pub.
947, Practice Before the IRS and
Power of Attorney.
Accounting Methods
Figure taxable income using the
method of accounting regularly used in
keeping the estate’s or trust’s books
and records. Generally, permissible
methods include the cash method, the
accrual method, or any other method
authorized by the Internal Revenue
Code. In all cases, the method used
must clearly reflect income.
Generally, the estate or trust may
change its accounting method (for
income as a whole or for any material
item) only by getting consent on Form
3115, Application for Change in
Accounting Method. For more
1041_Prep_Book_10.indb 142
information, see Pub. 538, Accounting
Periods and Methods.
Accounting Periods
For a decedent’s estate, the moment of
death determines the end of the
decedent’s tax year and the beginning
of the estate’s tax year. As executor or
administrator, you choose the estate’s
tax period when you file its first income
tax return. The estate’s first tax year
may be any period of 12 months or less
that ends on the last day of a month. If
you select the last day of any month
other than December, you are adopting
a fiscal tax year.
To change the accounting period of
an estate, get Form 1128, Application
To Adopt, Change, or Retain a Tax
Year.
Generally, a trust must adopt a
calendar year. The following trusts are
exempt from this requirement:
• A trust that is exempt from tax under
section 501(a);
• A charitable trust described in section
4947(a)(1); and
• A trust that is treated as wholly
owned by a grantor under the rules of
sections 671 through 679.
Rounding Off to Whole
Dollars
You may round off cents to whole
dollars on the estate’s or trust’s return
and schedules. If you do round to
whole dollars, you must round all
amounts. To round, drop amounts
under 50 cents and increase amounts
from 50 to 99 cents to the next dollar.
For example, $1.39 becomes $1 and
$2.50 becomes $3.
If you have to add two or more
amounts to figure the amount to enter
on a line, include cents when adding
the amounts and round off only the
total.
Estimated Tax
Generally, an estate or trust must pay
estimated income tax for 2009 if it
expects to owe, after subtracting any
withholding and credits, at least $1,000
in tax, and it expects the withholding
and credits to be less than the smaller
of:
1. 90% of the tax shown on the
2009 tax return, or
2. 100% of the tax shown on the
2008 tax return (110% of that amount if
the estate’s or trust’s adjusted gross
income on that return is more than
$150,000, and less than 2/3 of gross
income for 2008 or 2009 is from
farming or fishing).
-8-
However, if a return was not filed for
2008 or that return did not cover a full
12 months, item 2 does not apply.
For this purpose, include household
employment taxes in the tax shown on
the tax return, but only if either of the
following is true:
• The estate or trust will have federal
income tax withheld for 2009 (see the
instructions on page 24 for line 24e), or
• The estate or trust would be required
to make estimated tax payments for
2009 even if it did not include
household employment taxes when
figuring estimated tax.
Exceptions
Estimated tax payments are not
required from:
1. An estate of a domestic decedent
or a domestic trust that had no tax
liability for the full 12-month 2008 tax
year;
2. A decedent’s estate for any tax
year ending before the date that is 2
years after the decedent’s death; or
3. A trust that was treated as owned
by the decedent if the trust will receive
the residue of the decedent’s estate
under the will (or if no will is admitted to
probate, the trust primarily responsible
for paying debts, taxes, and expenses
of administration) for any tax year
ending before the date that is 2 years
after the decedent’s death.
For more information, see Form
1041-ES, Estimated Income Tax for
Estates and Trusts.
Electronic Deposits
A financial institution that maintains a
TT&L account, and acts as a fiduciary
for at least 200 taxable trusts that are
required to pay estimated tax, may be
required to deposit the estimated tax
payments electronically using the
Electronic Federal Tax Payment
System (EFTPS). The electronic
deposit requirement applies in 2009 if:
• The total deposits of depository taxes
(such as estimated, employment, or
excise tax) in 2007 were more than
$200,000, or
• The fiduciary (on behalf of a trust)
was required to use EFTPS in 2008.
If the fiduciary is required to use
EFTPS on behalf of a trust and fails to
do so, it may be subject to a 10%
penalty.
A fiduciary that is not required to
make electronic deposits of estimated
tax on behalf of a trust may either use
the payment vouchers (see Form
1041-ES) or voluntarily participate in
EFTPS. To enroll in or get more
information about EFTPS, call
1-800-555-4477.
Depositing on time. For deposits
made by EFTPS to be on time, the
10/19/2009 10:14:20 AM

fiduciary must initiate the transaction at
least 1 business day before the date
the deposit is due.
Section 643(g) Election
Fiduciaries of trusts that pay estimated
tax may elect under section 643(g) to
have any portion of their estimated tax
payments allocated to any of the
beneficiaries.
The fiduciary of a decedent’s estate
may make a section 643(g) election
only for the final year of the estate.
You make the election by filing
Form 1041-T, Allocation of Estimated
Tax Payments to Beneficiaries, by the
65th day after the close of the estate’s
or trust’s tax year. Then, you include
that amount on the Schedule K-1 for
the beneficiary(ies) for whom you
elected it.
Failure to make a timely election will
result in the estimated tax payments
not being transferred to the
beneficiary(ies) even if you entered the
amount you wanted transferred on
Schedule K-1.
See the instructions for line 24b on
page 24 for more details.
Interest and Penalties
Interest
Interest is charged on taxes not paid by
the due date, 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. Interest is
charged on the penalty from the due
date of the return (including
extensions). The interest charge is
figured at a rate determined under
section 6621.
Late Filing of Return
The law provides a penalty of 5% of the
tax due for each month, or part of a
month, for which a return is not filed up
to a maximum of 25% of the tax due
(15% for each month, or part of a
month, up to a maximum of 75% if the
failure to file is fraudulent). If the return
is more than 60 days late, the minimum
penalty is the smaller of $100 or the tax
due. The penalty will not be imposed if
you can show that the failure to file on
time was due to reasonable cause. If
the failure is due to reasonable cause,
attach an explanation to the return.
Late Payment of Tax
Generally, the penalty for not paying
tax when due is 1/2 of 1% of the unpaid
amount for each month or part of a
month it remains unpaid. The maximum
1041_Prep_Book_10.indb 143
penalty is 25% of the unpaid amount.
The penalty applies to any unpaid tax
on the return. Any penalty is in addition
to interest charges on late payments.
If you include interest on either
TIP of these penalties with your
payment, identify and enter
these amounts in the bottom margin of
Form 1041, page 1. Do not include the
interest or penalty amount in the
balance of tax due on line 27.
Failure To Provide
Information Timely
You must provide Schedule K-1 (Form
1041), on or before the day you are
required to file Form 1041, to each
beneficiary who receives a distribution
of property or an allocation of an item of
the estate.
For each failure to provide Schedule
K-1 to a beneficiary when due and each
failure to include on Schedule K-1 all
the information required to be shown
(or the inclusion of incorrect
information), a $50 penalty may be
imposed with regard to each Schedule
K-1 for which a failure occurs. The
maximum penalty is $100,000 for all
such failures during a calendar year. If
the requirement to report information is
intentionally disregarded, each $50
penalty is increased to $100 or, if
greater, 10% of the aggregate amount
of items required to be reported, and
the $100,000 maximum does not apply.
The penalty will not be imposed if
the fiduciary can show that not
providing information timely was due to
reasonable cause and not due to willful
neglect.
Underpaid Estimated Tax
If the fiduciary underpaid estimated tax,
use Form 2210, Underpayment of
Estimated Tax by Individuals, Estates,
and Trusts, to figure any penalty. Enter
the amount of any penalty on line 26,
Form 1041.
Trust Fund Recovery Penalty
This penalty may apply if certain excise,
income, social security, and Medicare
taxes that must be collected or withheld
are not collected or withheld, or these
taxes are not paid. These taxes are
generally reported on Forms 720, 941,
943, 944, or 945. 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, or 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, Pub. 15
(Circular E), Employer’s Tax Guide, or
Pub. 51 (Circular A), Agricultural
Employer’s Tax Guide, for more details,
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INSTRUCTIONS FOR FORM 1041 143
including the definition of responsible
persons.
Other Penalties
Other penalties can be imposed for
negligence, substantial understatement
of tax, and fraud. See Pub. 17, Your
Federal Income Tax, for details on
these penalties.
Other Forms That May
Be Required
Form W-2, Wage and Tax Statement,
and Form W-3, Transmittal of Wage
and Tax Statements.
Form 56, Notice Concerning
Fiduciary Relationship. You must notify
the IRS of the creation or termination of
a fiduciary relationship. You may use
Form 56 to provide this notice to the
IRS.
Form 706, United States Estate (and
Generation-Skipping Transfer) Tax
Return, or Form 706-NA, United States
Estate (and Generation-Skipping
Transfer) Tax Return, Estate of
nonresident not a citizen of the United
States.
Form 706-GS(D),
Generation-Skipping Transfer Tax
Return for Distributions.
Form 706-GS(D-1), Notification of
Distribution From a
Generation-Skipping Trust.
Form 706-GS(T),
Generation-Skipping Transfer Tax
Return for Terminations.
Form 709, United States Gift (and
Generation-Skipping Transfer) Tax
Return.
Form 720, Quarterly Federal Excise
Tax Return. Use Form 720 to report
environmental excise taxes,
communications and air transportation
taxes, fuel taxes, luxury tax on
passenger vehicles, manufacturers’
taxes, ship passenger tax, and certain
other excise taxes.
Caution. See Trust Fund Recovery
Penalty earlier.
Form 926, Return by a U.S.
Transferor of Property to a Foreign
Corporation. Use this form to report
certain information required under
section 6038B.
Form 940, Employer’s Annual
Federal Unemployment (FUTA) Tax
Return. The estate or trust may be
liable for FUTA tax and may have to file
Form 940 if it paid wages of $1,500 or
more in any calendar quarter during the
calendar year (or the preceding
calendar year) or one or more
employees worked for the estate or
trust for some part of a day in any 20
different weeks during the calendar
year (or the preceding calendar year).
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 144 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
Form 941, Employer’s QUARTERLY
Federal Tax Return. Employers must
file this form quarterly to report income
tax withheld on wages and employer
and employee social security and
Medicare taxes. Certain small
employers must file Form 944,
Employer’s ANNUAL Federal Tax
Return, instead of Form 941. For more
information, see the instructions for
Form 944. Agricultural employers must
file Form 943, Employer’s Annual
Federal Tax Return for Agricultural
Employees, instead of Form 941, to
report income tax withheld and
employer and employee social security
and Medicare taxes on farmworkers.
Caution. See Trust Fund Recovery
Penalty earlier.
Form 945, Annual Return of
Withheld Federal Income Tax. Use this
form to report income tax withheld from
nonpayroll payments, including
pensions, annuities, IRAs, gambling
winnings, and backup withholding.
Caution. See Trust Fund Recovery
Penalty earlier.
Form 1040, U.S. Individual Income
Tax Return.
Form 1040NR, U.S. Nonresident
Alien Income Tax Return.
Form 1041-A, U.S. Information
Return Trust Accumulation of
Charitable Amounts.
Form 1042, Annual Withholding Tax
Return for U.S. Source Income of
Foreign Persons, and Form 1042-S,
Foreign Person’s U.S. Source Income
Subject to Withholding. Use these
forms to report and transmit withheld
tax on payments or distributions made
to nonresident alien individuals, foreign
partnerships, or foreign corporations to
the extent such payments or
distributions constitute gross income
from sources within the United States
that is not effectively connected with a
U.S. trade or business. For more
information, see sections 1441 and
1442, and Pub. 515, Withholding of Tax
on Nonresident Aliens and Foreign
Entities.
Forms 1099-A, B, INT, LTC, MISC,
OID, R, S, and SA. You may have to
file these information returns to report
acquisitions or abandonments of
secured property; proceeds from broker
and barter exchange transactions;
interest payments; payments of
long-term care and accelerated death
benefits; miscellaneous income
payments; original issue discount;
distributions from pensions, annuities,
retirement or profit-sharing plans, IRAs
(including SEPs, SIMPLEs, Roth IRAs,
Roth Conversions, and IRA
recharacterizations), Coverdell ESAs,
insurance contracts, etc.; proceeds
from real estate transactions; and
1041_Prep_Book_10.indb 144
distributions from an HSA, Archer MSA,
or Medicare Advantage MSA.
Also, use certain of these returns to
report amounts received as a nominee
on behalf of another person, except
amounts reported to beneficiaries on
Schedule K-1 (Form 1041).
Form 8275, Disclosure Statement.
File Form 8275 to disclose items or
positions, except those contrary to a
regulation, that are not otherwise
adequately disclosed on a tax return.
The disclosure is made to avoid parts
of the accuracy-related penalty
imposed for disregard of rules or
substantial understatement of tax. Form
8275 is also used for disclosures
relating to preparer penalties for
understatements due to unrealistic
positions or disregard of rules.
Form 8275-R, Regulation Disclosure
Statement, is used to disclose any item
on a tax return for which a position has
been taken that is contrary to Treasury
regulations.
Form 8288, U.S. Withholding Tax
Return for Dispositions by Foreign
Persons of U.S. Real Property
Interests, and Form 8288-A, Statement
of Withholding on Dispositions by
Foreign Persons of U.S. Real Property
Interests. Use these forms to report and
transmit withheld tax on the sale of U.S.
real property by a foreign person. Also,
use these forms to report and transmit
tax withheld from amounts distributed to
a foreign beneficiary from a “U.S. real
property interest account” that a
domestic estate or trust is required to
establish under Regulations section
1.1445-5(c)(1)(iii).
Form 8300, Report of Cash
Payments Over $10,000 Received in a
Trade or Business. Generally, this form
is used to report the receipt of more
than $10,000 in cash or foreign
currency in one transaction (or a series
of related transactions).
Form 8855, Election To Treat a
Qualified Revocable Trust as Part of an
Estate. This election allows a qualified
revocable trust to be treated and taxed
(for income tax purposes) as part of its
related estate during the election
period.
Form 8865, Return of U.S. Persons
With Respect to Certain Foreign
Partnerships. The estate or trust may
have to file Form 8865 if it:
1. Controlled a foreign partnership
(that is, owned more than a 50% direct
or indirect interest in a foreign
partnership);
2. Owned at least a 10% direct or
indirect interest in a foreign partnership
while U.S. persons controlled that
partnership;
-10-
3. Had an acquisition, disposition, or
change in proportional interest in a
foreign partnership that:
a. Increased its direct interest to at
least 10%;
b. Reduced its direct interest of at
least 10% to less than 10%; or
c. Changed its direct interest by at
least a 10% interest.
4. Contributed property to a foreign
partnership in exchange for a
partnership interest if:
a. Immediately after the
contribution, the estate or trust owned,
directly or indirectly, at least a 10%
interest in the foreign partnership or
b. The fair market value (FMV) of
the property the estate or trust
contributed to the foreign partnership,
for a partnership interest, when added
to other contributions of property made
to the foreign partnership during the
preceding 12-month period, exceeds
$100,000.
Also, the estate or trust may have to
file Form 8865 to report certain
dispositions by a foreign partnership of
property it previously contributed to that
foreign partnership if it was a partner at
the time of the disposition.
For more details, including penalties
for failing to file Form 8865, see Form
8865 and its separate instructions.
Tax shelter disclosure statement.
Use Form 8886, Reportable
Transaction Disclosure Statement, to
disclose information for each reportable
transaction in which the trust
participated, directly or indirectly. Form
8886 must be filed for each tax year
that the federal income tax liability of
the estate or trust is affected by its
participation in the transaction. The
estate or trust may have to pay a
penalty if it has a requirement to file
Form 8886 but you fail to file it. The
following are reportable transactions.
• Any transaction that is the same as
or substantially similar to tax avoidance
transactions identified by the IRS as
listed transaction.
• Any transaction offered under
conditions of confidentiality and for
which the estate or trust paid a
minimum fee (confidential transaction).
• Any transaction for which the estate
or trust or a related party has
contractual protection against
disallowance of the tax benefits
(transaction with contractual
protection).
• Any transaction resulting in a loss of
at least $2 million in any single year or
$4 million in any combination of years
($50,000 in any single year if the loss is
generated by a section 988 transaction)
(loss transactions).
• Any transaction substantially similar
to one of the types of transactions
10/19/2009 10:14:20 AM

identified by the IRS as a transaction of
interest.
See the Instructions for Form 8886
for more details and exceptions.
Form 8918, Material Advisor
Disclosure Statement. Material advisors
who provide material aid, assistance, or
advice on organizing, managing,
promoting, selling, implementing,
insuring, or carrying out any reportable
transaction, and who directly or
indirectly receive or expect to receive a
minimum fee, must use Form 8918 to
disclose any reportable transaction
under Regulations section 301.6111-3.
For more information, see Form 8918
and its instructions.
Additional Information
The following publications may assist
you in preparing Form 1041:
• Pub. 550, Investment Income and
Expenses,
• Pub. 559, Survivors, Executors, and
Administrators, and
• Pub. 590, Individual Retirement
Arrangements (IRAs).
Assembly and
Attachments
Assemble any schedules, forms, and
attachments behind Form 1041 in the
following order:
1. Schedule I (Form 1041);
2. Schedule D (Form 1041);
3. Form 4952;
4. Schedule H (Form 1040);
5. Form 4136;
6. Form 8855;
7. All other schedules and
forms; and
8. All attachments.
Attachments
If you need more space on the forms or
schedules, attach separate sheets. Use
the same size and format as on the
printed forms. But show the totals on
the printed forms.
Attach these separate sheets after
all the schedules and forms. Enter the
estate’s or trust’s EIN on each sheet.
Do not file a copy of the decedent’s
will or the trust instrument unless the
IRS requests it.
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
1041_Prep_Book_10.indb 145
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 on page 15 for details on what
makes a trust a grantor trust.
In general, a grantor trust is ignored
for 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.
The following instructions apply
! only to grantor type trusts that
CAUTION are not using an optional filing
method.
File Form 1041 for a grantor trust
unless you use an optional filing
method.
If the entire trust is a grantor trust, fill
in only the entity portion 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 treated as a
grantor trust, report on Form 1041 only
the part of the income, deductions, etc.,
that is taxable to the trust. The amounts
that are taxable directly to the grantor
are shown only on an attachment to the
form. Do not use Schedule K-1 (Form
1041) as the attachment.
Also, the fiduciary must give the
grantor (owner) of the trust a copy of
the attachment.
On the attachment, report:
• 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
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INSTRUCTIONS FOR FORM 1041 145
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
Schedule D (Form 1040). The trust may
not net the capital gains and losses, nor
may it issue John Doe a Schedule K-1
(Form 1041) showing a $10 long-term
capital loss.
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
10/19/2009 10:14:21 AM
 146 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
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
TIP 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 March 2, 2009 (March 31,
2009, 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
1041_Prep_Book_10.indb 146
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 March 2, 2009 (March 31,
2009, 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).
-12-
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 28% 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:
10/19/2009 10:14:21 AM

• 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 on page 11.
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
1041_Prep_Book_10.indb 147
files a petition under any chapter of title
11 of the U.S. Code.
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
$8,950 or more for tax years beginning
in 2008.
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
CAUTION relieve the individual debtor 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. The period can be no
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 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:
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INSTRUCTIONS FOR FORM 1041 147
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
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
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 148 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
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
2008, a bankruptcy estate is allowed a
personal exemption of $3,500.
Standard deduction. For tax years
beginning in 2008, a bankruptcy estate
that does not itemize deductions is
allowed a standard deduction of
$5,450.
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
1041_Prep_Book_10.indb 148
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:
But not
Over — The tax is:
over —
$0 $8,025 10%
8,025 32,550 $802.50 + 15%
32,550 65,725 4,481.25 + 25%
65,725 100,150 12,775.00 + 28%
100,150 178,850 22,414.00 + 33%
178,850 ------ 48,385.00 + 35%
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 21126, Philadelphia, PA 19114
(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 atwww.irs.gov/irb/
2006-22_IRB/ar12.html.
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.
-14-
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.
Of the Complete lines 24 through 29 of Form
amount 1041, and sign and date it.
over —
$0 In a chapter 11 case filed after
8,025 October 16, 2005, the bankruptcy
32,550
65,725
estate’s gross income may be affected
100,150 by section 1115 of title 11 of the U.S.
178,850 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.
Specific Instructions
Name of Estate or Trust
Copy the exact name of the estate or
trust from the Form SS-4, Application
for Employer Identification Number, that
you used to apply for the EIN. If the
10/19/2009 10:14:22 AM

name of the trust was changed during
the tax year for which you are filing,
enter the trust’s new name and check
the Change in trust’s name box in item
F.
If a grantor type trust (discussed
below), write the name, identification
number, and address of the grantor(s)
or other owner(s) in parentheses after
the name of the trust.
Name and Title of
Fiduciary
Enter the name and title of the
fiduciary. If the name entered is
different than the name on the prior
year’s return, see Change in Fiduciary’s
Name and Change in Fiduciary on
page 17.
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 fiduciary has a
P.O. box, show the box number
instead.
If you want a third party (such as an
accountant or an attorney) to receive
mail for the estate or trust, enter on the
street address line “C/O” followed by
the third party’s name and street
address or P.O. box.
If the estate or trust has had a
change of address (including a change
to an “in care of” name and address)
and did not file Form 8822, Change of
Address, check the Change in
fiduciary’s address box in item F.
If the estate or trust has a change of
mailing address (including a new ‘‘in
care of’’ name and address) after filing
its return, file Form 8822 to notify the
IRS of the change.
A. Type of Entity
Check the appropriate box that
describes the entity for which you are
filing the return.
If only a portion of a trust is a grantor
type trust or if only a portion of an
electing small business trust is the S
portion, then more than one box can be
checked.
There are special reporting
! requirements for grantor type
CAUTION trusts, pooled income funds,
electing small business trusts, and
bankruptcy estates. See Special
Reporting Instructions on page 11.
Decedent’s Estate
An estate of a deceased person is a
taxable entity separate from the
decedent. It generally continues to exist
until the final distribution of the assets
1041_Prep_Book_10.indb 149
of the estate is made to the heirs and
other beneficiaries. The income earned
from the property of the estate during
the period of administration or
settlement must be accounted for and
reported by the estate.
Simple Trust
A trust may qualify as a simple trust if:
1. The trust instrument requires that
all income must be distributed currently;
2. The trust instrument does not
provide that any amounts are to be
paid, permanently set aside, or used for
charitable purposes; and
3. The trust does not distribute
amounts allocated to the corpus of the
trust.
Complex Trust
A complex trust is any trust that does
not qualify as a simple trust as
explained above.
Qualified Disability Trust
A qualified disability trust is any
nongrantor trust:
1. Described in 42 U.S.C.
1396p(c)(2)(B)(iv) and established
solely for the benefit of an individual
under 65 years of age who is disabled,
and
2. All the beneficiaries of which are
determined by the Commissioner of
Social Security to have been disabled
for some part of the tax year within the
meaning of 42 U.S.C. 1382c(a)(3).
A trust will not fail to meet item 2
above just because the trust’s corpus
may revert to a person who is not
disabled after the trust ceases to have
any disabled beneficiaries.
ESBT (S Portion Only)
The S portion of an ESBT is the portion
of the trust that consists of S
corporation stock and that is not treated
as owned by the grantor or another
person. See page 12 of the instructions
for more information about an ESBT.
Grantor Type Trust
A grantor type trust is a legal trust
under applicable state law that is not
recognized as a separate taxable entity
for income tax purposes because the
grantor or other substantial owners
have not relinquished complete
dominion and control over the trust.
Generally, for transfers made in trust
after March 1, 1986, the grantor is
treated as the owner of any portion of a
trust in which he or she has a
reversionary interest in either the
income or corpus therefrom, if, as of
the inception of that portion of the trust,
the value of the reversionary interest is
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INSTRUCTIONS FOR FORM 1041 149
more than 5% of the value of that
portion. Also, the grantor is treated as
holding any power or interest that was
held by either the grantor’s spouse at
the time that the power or interest was
created or who became the grantor’s
spouse after the creation of that power
or interest. See Grantor Type Trusts on
page 11 for more information.
Pre-need funeral trusts. The
purchasers of pre-need funeral services
are the grantors and the owners of
pre-need funeral trusts established
under state laws. See Rev. Rul.
87-127, 1987-2 C.B. 156. However, the
trustees of pre-need funeral trusts can
elect to file the return and pay the tax
for qualified funeral trusts. For more
information, see Form 1041-QFT, U.S.
Income Tax Return for Qualified
Funeral Trusts.
Nonqualified deferred compensation
plans. Taxpayers may adopt and
maintain grantor trusts in connection
with nonqualified 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 in rabbi
trust arrangements. The procedure also
provides guidance for requesting
rulings on the plans that use these
trusts.
Bankruptcy Estate
A chapter 7 or 11 bankruptcy estate is
a separate and distinct taxable entity
from the individual debtor for federal
income tax purposes. See Bankruptcy
Estates on page 13.
For more information, see section
1398 and Pub. 908, Bankruptcy Tax
Guide.
Pooled Income Fund
A pooled income fund is a split-interest
trust with a remainder interest for a
public charity and a life income interest
retained by the donor or for another
person. The property is held in a pool
with other pooled income fund property
and does not include any tax-exempt
securities. The income for a retained
life interest is figured using the yearly
rate of return earned by the trust. See
section 642(c) and the related
regulations for more information.
B. Number of Schedules
K-1 Attached
Every trust or decedent’s estate
claiming an income distribution
deduction on page 1, line 18, must
enter the number of Schedules K-1
(Form 1041) that are attached to Form
1041.
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 150 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
C. Employer
Identification Number
Every estate or trust that is required to
file Form 1041 must have an EIN. An
EIN may be applied for:
• Online by clicking on the EIN link at
www.irs.gov/businesses/small. The EIN
is issued immediately once the
application information is validated.
• By telephone at 1-800-829-4933 from
7:00 a.m. to 10:00 p.m. in the
fiduciary’s local time zone. Assistance
provided to callers from Alaska and
Hawaii will be based on the hours of
operation in the Pacific time zone.
• By mailing or faxing Form SS-4,
Application for Employer Identification
Number.
If the estate or trust 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 Pub. 583,
Starting a Business and Keeping
Records.
D. Date Entity Created
Enter the date the trust was created, or,
if a decedent’s estate, the date of the
decedent’s death.
E. Nonexempt Charitable
and Split-Interest Trusts
Section 4947(a)(1) Trust
Check this box if the trust is a
nonexempt charitable trust within the
meaning of section 4947(a)(1).
A nonexempt charitable trust is a
trust:
• That is not exempt from tax under
section 501(a);
• In which all of the unexpired interests
are devoted to one or more charitable
purposes described in section
170(c)(2)(B); and
• For which a deduction was allowed
under section 170 (for individual
taxpayers) or similar Code section for
personal holding companies, foreign
personal holding companies, or estates
or trusts (including a deduction for
estate or gift tax purposes).
Nonexempt charitable trust treated
as a private foundation. If a
nonexempt charitable trust is treated as
though it were a private foundation
under section 509, then the fiduciary
must file Form 990-PF, Return of
Private Foundation, in addition to Form
1041.
If a nonexempt charitable trust is
treated as though it were a private
foundation, and it has no taxable
income under Subtitle A, it may answer
Statement 15 on Part VII-A of Form
990-PF, instead of filing Form 1041 to
1041_Prep_Book_10.indb 150
meet its section 6012 filing requirement
for that tax year.
Excise taxes. If a nonexempt
charitable trust is treated as a private
foundation, then it is subject to the
same excise taxes under chapters 41
and 42 that a private foundation is
subject to. If the nonexempt charitable
trust is liable for any of these taxes
(except the section 4940 tax), then it
reports these taxes on Form 4720,
Return of Certain Excise Taxes Under
Chapters 41 and 42 of the Internal
Revenue Code. Taxes paid by the trust
on Form 4720 or on Form 990-PF (the
section 4940 tax) cannot be taken as a
deduction on Form 1041.
Not a Private Foundation
Check this box if the nonexempt
charitable trust (section 4947(a)(1)) is
not treated as a private foundation
under section 509. For more
information, see Regulations section
53.4947-1.
Other returns that must be filed. If a
nonexempt charitable trust is not
treated as though it were a private
foundation, the fiduciary must file, in
addition to Form 1041, Form 990 (or
Form 990-EZ), Return of Organization
Exempt From Income Tax, if the trust
meets the filing requirements for either
of those forms.
If a nonexempt charitable trust is not
treated as though it were a private
foundation, and it has no taxable
income under Subtitle A, it may answer
lines 12a and 12b in Part V of Form
990 (line 43 in Part V of Form 990-EZ)
instead of filing Form 1041 to meet its
section 6012 filing requirement for that
tax year.
Section 4947(a)(2) Trust
Check this box if the trust is a
split-interest trust described in section
4947(a)(2).
A split-interest trust is a trust that:
• Is not exempt from tax under section
501(a);
• Has some unexpired interests that
are devoted to purposes other than
religious, charitable, or similar purposes
described in section 170(c)(2)(B); and
• Has amounts transferred in trust after
May 26, 1969, for which a deduction
was allowed under section 170 (for
individual taxpayers) or similar Code
sections for personal holding
companies, foreign personal holding
companies, or estates or trusts
(including a deduction for estate or gift
tax purposes).
Other returns that must be filed.
The fiduciary of a split-interest trust
must file Form 5227. However, see the
Instructions for Form 5227 for the
exception that applies to split-interest
-16-
trusts other than section 664 charitable
remainder trusts.
F. Initial Return,
Amended Return, etc.
Amended Return
If you are filing an amended Form
1041:
• Check the “Amended return” box,
• Complete the entire return,
• Correct the appropriate lines with the
new information, and
• Refigure the estate’s or trust’s tax
liability.
If the total tax on line 23 is larger on
the amended return than on the original
return, you generally should pay the
difference with the amended return.
However, you should adjust this
amount if there is any increase or
decrease in the total payments shown
on line 25.
Attach a sheet that explains the
reason for the amendments and
identifies the lines and amounts being
changed on the amended return.
Amended Schedule H (Form 1040).
If you discover an error on a Schedule
H that you previously filed with Form
1041, file an “Amended” Form 1041
and attach a corrected Schedule H.
In the top margin of your corrected
Schedule H, write “Amended,” (using
red ink, if possible) and the date you
discovered the error. Also, on an
attachment explain the reason for your
correction. If you owe tax, pay the tax in
full with your amended Form 1041. If
you overpaid tax on a previously filed
Schedule H, depending on whether you
choose the adjustment or claim for
refund process to correct the error, you
must either repay or reimburse the
employee’s share of social security and
Medicare tax or get the employee’s
consent to the filing of a refund claim
for their share. See Pub. 926,
Household Employer’s Tax Guide, for
more information.
Amended Schedule K-1 (Form 1041).
If the amended return results in a
change to income, or a change in
distribution of any income or other
information provided to a beneficiary,
an amended Schedule K-1 (Form 1041)
must also be filed with the amended
Form 1041 and given to each
beneficiary. Check the “Amended K-1”
box at the top of the amended
Schedule K-1.
Final Return
Check this box if this is a final return
because the estate or trust has
terminated. Also, check the “Final K-1”
box at the top of Schedule K-1.
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If, on the final return, there are
excess deductions, an unused capital
loss carryover, or an NOL carryover,
see the instructions for Schedule K-1,
box 11, on page 34.
Change in Trust’s Name
If the name of the trust has changed
from the name shown on the prior
year’s return (or Form SS-4 if this is the
first return being filed), be sure to check
this box.
Change in Fiduciary
If a different fiduciary enters his or her
name on the line for Name and title of
fiduciary than was shown on the prior
year’s return (or Form SS-4 if this is the
first return being filed) and you did not
file a Form 8822, be sure to check this
box. If there is a change in the fiduciary
whose address is used as the mailing
address for the estate or trust after the
return is filed, use Form 8822 to notify
the IRS.
Change in Fiduciary’s Name
If the fiduciary changed his or her name
from the name that he or she entered
on the prior year’s return (or Form SS-4
if this is the first return being filed), be
sure to check this box.
Change in Fiduciary’s
Address
If the same fiduciary who filed the prior
year’s return (or Form SS-4 if this is the
first return being filed) files the current
year’s return and changed the address
on the return (including a change to an
‘‘in care of’’ name and address), and
did not report the change on Form
8822, check this box.
If the address shown on Form 1041
changes after you file the form
(including a change to an ‘‘in care of’’
name and address), file Form 8822 to
notify the IRS of the change.
G. Section 645 Election
If a section 645 election was made by
filing Form 8855, check the box in item
G. See Special Rule for Certain
Revocable Trusts under Who Must File
and Form 8855 for more information
about this election.
Income
Special Rule for Blind Trust
If you are reporting income from a
qualified blind trust (under the Ethics in
Government Act of 1978), do not
identify the payer of any income to the
trust but complete the rest of the return
as provided in the instructions. Also
write “Blind Trust” at the top of page 1.
1041_Prep_Book_10.indb 151
Extraterritorial Income
Exclusion
The extraterritorial income exclusion is
not allowed for transactions after 2006.
However, income from certain
long-term sales and leases may still
qualify for the exclusion. For details and
to figure the amount of the exclusion,
see Form 8873, Extraterritorial Income
Exclusion, and its separate instructions.
The estate or trust must report the
extraterritorial income exclusion on line
15a of Form 1041, page 1.
Although the extraterritorial income
exclusion is entered on line 15a, it is an
exclusion from income and should be
treated as tax-exempt income when
completing other parts of the return.
Line 1—Interest Income
Report the estate’s or trust’s share of
all taxable interest income that was
received during the tax year. Examples
of taxable interest include interest from:
• Accounts (including certificates of
deposit and money market accounts)
with banks, credit unions, and thrift
institutions;
• Notes, loans, and mortgages;
• U.S. Treasury bills, notes, and
bonds;
• U.S. savings bonds;
• Original issue discount; and
• Income received as a regular interest
holder of a real estate mortgage
investment conduit (REMIC).
For taxable bonds acquired after
1987, amortizable bond premium is
treated as an offset to the interest
income instead of as a separate
interest deduction. See Pub. 550.
For the year of the decedent’s death,
Forms 1099-INT issued in the
decedent’s name may include interest
income earned after the date of death
that should be reported on the income
tax return of the decedent’s estate.
When preparing the decedent’s final
income tax return, report on line 1 of
Schedule B (Form 1040) or Schedule 1
(Form 1040A) the total interest shown
on Form 1099-INT. Under the last entry
on line 1, subtotal all the interest
reported on line 1. Below the subtotal,
write “Form 1041” and the name and
address shown on Form 1041 for the
decedent’s estate. Also, show the part
of the interest reported on Form 1041
and subtract it from the subtotal.
Line 2a—Total Ordinary
Dividends
Report the estate’s or trust’s share of
all ordinary dividends received during
the tax year.
For the year of the decedent’s death,
Forms 1099-DIV issued in the
decedent’s name may include
dividends earned after the date of
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INSTRUCTIONS FOR FORM 1041 151
death that should be reported on the
income tax return of the decedent’s
estate. When preparing the decedent’s
final income tax return, report on line 5
of Schedule B (Form 1040) or Schedule
1 (Form 1040A) the ordinary dividends
shown on Form 1099-DIV. Under the
last entry on line 5, subtotal all the
dividends reported on line 5. Below the
subtotal, write “Form 1041” and the
name and address shown on Form
1041 for the decedent’s estate. Also,
show the part of the ordinary dividends
reported on Form 1041 and subtract it
from the subtotal.
Report capital gain distributions
TIP on Schedule D (Form 1041),
line 9.
Line 2b—Qualified
Dividends
Enter the beneficiary’s allocable share
of qualified dividends on line 2b(1) and
enter the estate’s or trust’s allocable
share on line 2b(2).
If the estate or trust received
qualified dividends that were derived
from IRD, you must reduce the amount
on line 2b(2) by the portion of the
estate tax deduction claimed on Form
1041, page 1, line 19, that is
attributable to those qualified dividends.
Do not reduce the amounts on line 2b
by any other allocable expenses.
Note. The beneficiary’s share (as
figured above) may differ from the
amount entered on line 2b of Schedule
K-1 (Form 1041).
Qualified dividends. Qualified
dividends are eligible for a lower tax
rate than other ordinary income.
Generally, these dividends are reported
to the estate or trust in box 1b of
Form(s) 1099-DIV. See Pub. 550 for
the definition of qualified dividends if
the estate or trust received dividends
not reported on Form 1099-DIV.
Exception. Some dividends may
be reported to the estate or trust as in
box 1b of Form 1099-DIV but are not
qualified dividends. These include:
• Dividends received on any share of
stock that the estate or trust held for
less than 61 days during the 121-day
period that began 60 days before the
ex-dividend date. The ex-dividend date
is the first date following the declaration
of a dividend on which the purchaser of
a stock is not entitled to receive the
next dividend payment. When counting
the number of days the stock was held,
include the day the estate or trust
disposed of the stock but not the day it
acquired the stock. However, you
cannot count certain days during which
the estate’s or trust’s risk of loss was
diminished. See Pub. 550 for more
details.
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 152 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
• Dividends attributable to periods
totaling more than 366 days that the
estate or trust received on any share of
preferred stock held for less than 91
days during the 181-day period that
began 90 days before the ex-dividend
date. When counting the number of
days the stock was held, include the
day the estate or trust disposed of the
stock but not the day it acquired the
stock. However, you cannot count
certain days during which the estate’s
or trust’s risk of loss was diminished.
See Pub. 550 for more details.
Preferred dividends attributable to
periods totaling less than 367 days are
subject to the 61-day holding period
rule above.
• Dividends on any share of stock to
the extent that the estate or trust is
under an obligation (including a short
sale) to make related payments with
respect to positions in substantially
similar or related property.
• Payments in lieu of dividends, but
only if you know or have reason to
know that the payments are not
qualified dividends.
If you have an entry on line
TIP 2b(2), be sure you use
Schedule D (Form 1041), the
Schedule D Tax Worksheet, or the
Qualified Dividends Tax Worksheet,
whichever applies, to figure the estate’s
or trust’s tax. Figuring the estate’s or
trust’s tax liability in this manner will
usually result in a lower tax.
Line 3—Business Income or
(Loss)
If the estate operated a business,
report the income and expenses on
Schedule C (Form 1040), Profit or Loss
From Business (or Schedule C-EZ
(Form 1040), Net Profit From
Business). Enter the net profit or (loss)
from Schedule C (or Schedule C-EZ)
on line 3.
Line 4—Capital Gain or
(Loss)
Enter the gain from Schedule D (Form
1041), Part III, line 15, column (3) or
the loss from Part IV, line 16.
Do not substitute Schedule D
! (Form 1040) for Schedule D
(Form 1041).
CAUTION
Line 5—Rents, Royalties,
Partnerships, Other Estates
and Trusts, etc.
Use Schedule E (Form 1040),
Supplemental Income and Loss, to
report the estate’s or trust’s share of
income or (losses) from rents, royalties,
partnerships, S corporations, other
estates and trusts, and REMICs. Also
use Schedule E (Form 1040) to report
farm rental income and expenses
1041_Prep_Book_10.indb 152
based on crops or livestock produced
by a tenant. Enter the net profit or (loss)
from Schedule E on line 5. See the
instructions for Schedule E (Form 1040)
for reporting requirements.
If the estate or trust received a
Schedule K-1 from a partnership, S
corporation, or other flow-through
entity, use the corresponding lines on
Form 1041 to report the interest,
dividends, capital gains, etc., from the
flow-through entity.
Line 6—Farm Income or
(Loss)
If the estate or trust operated a farm,
use Schedule F (Form 1040), Profit or
Loss From Farming, to report farm
income and expenses. Enter the net
profit or (loss) from Schedule F on line
6.
If an estate or trust has farm
! rental income and expenses
CAUTION based on crops or livestock
produced by a tenant, report the
income and expenses on Schedule E
(Form 1040). Do not use Form 4835 or
Schedule F (Form 1040) to report such
income and expenses and do not
include the net profit or (loss) from such
income and expenses on line 6.
Line 7—Ordinary Gain or
(Loss)
Enter from line 17, Form 4797, Sales of
Business Property, the ordinary gain or
loss from the sale or exchange of
property other than capital assets and
also from involuntary conversions
(other than casualty or theft).
Line 8—Other Income
Enter other items of income not
included on lines 1, 2a, and 3 through
7. List the type and amount on an
attached schedule if the estate or trust
has more than one item.
Items to be reported on line 8
include:
• Unpaid compensation received by
the decedent’s estate that is IRD, and
• Any part of a total distribution shown
on Form 1099-R, Distributions From
Pensions, Annuities, Retirement or
Profit-Sharing Plans, IRAs, Insurance
Contracts, etc., that is treated as
ordinary income. For more information,
see the separate instructions for Form
4972, Tax on Lump-Sum Distributions.
Deductions
Depreciation, Depletion, and
Amortization
A trust or decedent’s estate is allowed
a deduction for depreciation, depletion,
and amortization only to the extent the
deductions are not apportioned to the
beneficiaries. An estate or trust is not
-18-
allowed to make an election under
section 179 to expense certain tangible
property.
The estate’s or trust’s share of
depreciation, depletion, and
amortization should be reported on the
appropriate lines of Schedule C (or
C-EZ), E, or F (Form 1040), the net
income or loss from which is shown on
line 3, 5, or 6 of Form 1041. If the
deduction is not related to a specific
business or activity, then report it on
line 15a.
Depreciation. For a decedent’s
estate, the depreciation deduction is
apportioned between the estate and the
heirs, legatees, and devisees on the
basis of the estate’s income allocable
to each.
For a trust, the depreciation
deduction is apportioned between the
income beneficiaries and the trust on
the basis of the trust income allocable
to each, unless the governing
instrument (or local law) requires or
permits the trustee to maintain a
depreciation reserve. If the trustee is
required to maintain a reserve, the
deduction is first allocated to the trust,
up to the amount of the reserve. Any
excess is allocated among the
beneficiaries and the trust in the same
manner as the trust’s accounting
income. See Regulations section
1.167(h)-1(b).
Depletion. For mineral or timber
property held by a decedent’s estate,
the depletion deduction is apportioned
between the estate and the heirs,
legatees, and devisees on the basis of
the estate’s income from such property
allocable to each.
For mineral or timber property held
in trust, the depletion deduction is
apportioned between the income
beneficiaries and the trust based on the
trust income from such property
allocable to each, unless the governing
instrument (or local law) requires or
permits the trustee to maintain a
reserve for depletion. If the trustee is
required to maintain a reserve, the
deduction is first allocated to the trust,
up to the amount of the reserve. Any
excess is allocated among the
beneficiaries and the trust in the same
manner as the trust’s accounting
income. See Regulations section
1.611-1(c)(4).
Amortization. The deduction for
amortization is apportioned between an
estate or trust and its beneficiaries
under the same principles for
apportioning the deductions for
depreciation and depletion.
The deduction for the amortization of
reforestation expenditures under
section 194 is allowed only to an
estate.
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Allocation of Deductions for
Tax-Exempt Income
Generally, no deduction that would
otherwise be allowable is allowed for
any expense (whether for business or
for the production of income) that is
allocable to tax-exempt income.
Examples of tax-exempt income
include:
• Certain death benefits (section 101),
• Interest on state or local bonds
(section 103),
• Compensation for injuries or sickness
(section 104), and
• Income from discharge of
indebtedness in a title 11 case (section
108).
Exception. State income taxes and
business expenses that are allocable to
tax-exempt interest are deductible.
Expenses that are directly allocable
to tax-exempt income are allocated only
to tax-exempt income. A reasonable
proportion of expenses indirectly
allocable to both tax-exempt income
and other income must be allocated to
each class of income.
Deductions That May Be
Allowable for Estate Tax
Purposes
Administration expenses and casualty
and theft losses deductible on Form
706 may be deducted, to the extent
otherwise deductible for income tax
purposes, on Form 1041 if the fiduciary
files a statement waiving the right to
deduct the expenses and losses on
Form 706. The statement must be filed
before the expiration of the statutory
period of limitations for the tax year the
deduction is claimed. See Pub. 559 for
more information.
Accrued Expenses
Generally, an accrual basis taxpayer
can deduct accrued expenses in the tax
year that: (a) all events have occurred
that determine the liability; and (b) the
amount of the liability can be figured
with reasonable accuracy. However, all
the events that establish liability are
treated as occurring only when
economic performance takes place.
There are exceptions for recurring
items. See section 461(h).
Limitations on
Deductions
At-Risk Loss Limitations
Generally, the amount the estate or
trust has “at-risk” limits the loss it can
deduct for any tax year. Use Form
6198, At-Risk Limitations, to figure the
deductible loss for the year and file it
with Form 1041. For more information,
1041_Prep_Book_10.indb 153
see Pub. 925, Passive Activity and
At-Risk Rules.
Passive Activity Loss and
Credit Limitations
In general. Section 469 and the
regulations thereunder generally limit
losses from passive activities to the
amount of income derived from all
passive activities. Similarly, credits from
passive activities are generally limited
to the tax attributable to such activities.
These limitations are first applied at the
estate or trust level.
Generally, an activity is a passive
activity if it involves the conduct of any
trade or business, and the taxpayer
does not materially participate in the
activity. Passive activities do not
include working interests in oil and gas
properties. See section 469(c)(3).
Note. Material participation standards
for estates and trusts have not been
established by regulations.
For a grantor trust, material
participation is determined at the
grantor level.
If the estate or trust distributes an
interest in a passive activity, the basis
of the property immediately before the
distribution is increased by the passive
activity losses allocable to the interest,
and such losses cannot be deducted.
See section 469(j)(12).
Losses from passive activities
TIP are first subject to the at-risk
rules. When the losses are
deductible under the at-risk rules, the
passive activity rules then apply.
Rental activities. Generally, rental
activities are passive activities, whether
or not the taxpayer materially
participates. However, certain
taxpayers who materially participate in
real property trades or businesses are
not subject to the passive activity
limitations on losses from rental real
estate activities in which they materially
participate. For more details, see
section 469(c)(7).
For tax years of an estate ending
less than 2 years after the decedent’s
date of death, up to $25,000 of
deductions and deduction equivalents
of credits from rental real estate
activities in which the decedent actively
participated are allowed. Any excess
losses or credits are suspended for the
year and carried forward.
Portfolio income. Portfolio income is
not treated as income from a passive
activity, and passive losses and credits
generally may not be applied to offset
it. Portfolio income generally includes
interest, dividends, royalties, and
income from annuities. Portfolio income
of an estate or trust must be accounted
for separately.
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INSTRUCTIONS FOR FORM 1041 153
Forms to file. See Form 8582,
Passive Activity Loss Limitations, to
figure the amount of losses allowed
from passive activities. See Form
8582-CR, Passive Activity Credit
Limitations, to figure the amount of
credit allowed for the current year.
Transactions Between
Related Taxpayers
Under section 267, a trust that uses the
accrual method of accounting may only
deduct business expenses and interest
owed to a related party in the year the
payment is included in the income of
the related party. For this purpose, a
related party includes:
1. A grantor and a fiduciary of any
trust;
2. A fiduciary of a trust and a
fiduciary of another trust, if the same
person is a grantor of both trusts;
3. A fiduciary of a trust and a
beneficiary of such trust;
4. A fiduciary of a trust and a
beneficiary of another trust, if the same
person is a grantor of both trusts;
5. A fiduciary of a trust and a
corporation more than 50% in value of
the outstanding stock of which is
owned, directly or indirectly, by or for
the trust or by or for a person who is a
grantor of the trust; and
6. An executor of an estate and a
beneficiary of that estate, except for a
sale or exchange to satisfy a pecuniary
bequest (that is, a bequest of a sum of
money).
Line 10—Interest
Enter the amount of interest (subject to
limitations) paid or incurred by the
estate or trust on amounts borrowed by
the estate or trust, or on debt acquired
by the estate or trust (for example,
outstanding obligations from the
decedent) that is not claimed elsewhere
on the return.
If the proceeds of a loan were used
for more than one purpose (for
example, to purchase a portfolio
investment and to acquire an interest in
a passive activity), the fiduciary must
make an interest allocation according to
the rules in Temporary Regulations
section 1.163-8T.
Do not include interest paid on
indebtedness incurred or continued to
purchase or carry obligations on which
the interest is wholly exempt from
income tax.
Personal interest is not deductible.
Examples of personal interest include
interest paid on:
• Revolving charge accounts used to
purchase personal use property;
• Personal notes for money borrowed
from a bank, credit union, or other
person;
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 154 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E

• Installment loans on personal use
property; and
• Underpayments of federal, state, or
local income taxes.
Interest that is paid or incurred on
indebtedness allocable to a trade or
business (including a rental activity)
should be deducted on the appropriate
line of Schedule C (or C-EZ), E, or F
(Form 1040), the net income or loss
from which is shown on line 3, 5, or 6 of
Form 1041.
Types of interest to include on line
10 are:
1. Any investment interest (subject
to limitations — see below);
2. Any qualified residence interest
(see later); and
3. Any interest payable under
section 6601 on any unpaid portion of
the estate tax attributable to the value
of a reversionary or remainder interest
in property for the period during which
an extension of time for payment of
such tax is in effect.
Investment interest. Generally,
investment interest is interest (including
amortizable bond premium on taxable
bonds acquired after October 22, 1986,
but before January 1, 1988) that is paid
or incurred on indebtedness that is
properly allocable to property held for
investment. Investment interest does
not include any qualified residence
interest, or interest that is taken into
account under section 469 in figuring
income or loss from a passive activity.
Generally, net investment income is
the excess of investment income over
investment expenses. Investment
expenses are those expenses (other
than interest) allowable after application
of the 2% floor on miscellaneous
itemized deductions.
The amount of the investment
interest deduction may be limited. Use
Form 4952, Investment Interest
Expense Deduction, to figure the
allowable investment interest
deduction.
If you must complete Form 4952,
check the box on line 10 of Form 1041
and attach Form 4952. Then, add the
deductible investment interest to the
other types of deductible interest and
enter the total on line 10.
Qualified residence interest. Interest
paid or incurred by an estate or trust on
indebtedness secured by a qualified
residence of a beneficiary of an estate
or trust is treated as qualified residence
interest if the residence would be a
qualified residence (that is, the principal
residence or the secondary residence
selected by the beneficiary) if owned by
the beneficiary. The beneficiary must
have a present interest in the estate or
trust or an interest in the residuary of
the estate or trust. See Pub. 936, Home
Mortgage Interest Deduction, for an
explanation of the general rules for
deducting home mortgage interest.
See section 163(h)(3) for a definition
of qualified residence interest and for
limitations on indebtedness.
Qualified mortgage insurance
premiums. Enter (on the worksheet
below) the qualified mortgage
insurance premiums paid under a
mortgage insurance contract issued
after December 31, 2006, in connection
with qualified residence acquisition debt
that was secured by a principal or
secondary residence. See Prepaid
mortgage insurance below if the estate
or trust paid any premiums allocable
after 2008. If at least one other person
was liable for and paid the premiums in
connection with the loan, and the
premiums were reported on Form 1098,
include the estate’s or trust’s share of
the 2008 premiums on the worksheet
below.
Qualified mortgage insurance is
mortgage insurance provided by the
Department of Veterans Affairs, the
Federal Housing Administration, or the
Rural Housing Service, and private
mortgage insurance (as defined in
section 2 of the Homeowners
Protection Act of 1998 as in effect on
December 20, 2006).
Mortgage insurance provided by the
Department of Veterans Affairs and the
Rural Housing Service is commonly
known as a funding fee and guarantee
fee, respectively. These fees can be
deducted fully in 2008 if the mortgage
insurance contract was issued in 2008.
Contact the mortgage insurance issuer
to determine the deductible amount if it
is not included in box 4 of Form 1098.
Prepaid mortgage insurance. If
the estate or trust paid premiums for
qualified mortgage insurance that are
allocable to periods after 2008, such
premiums are treated as paid in the
year in which they are allocated. No
deduction is allowed for the
unamortized balance if the mortgage is
satisfied before its term. The two
preceding sentences do not apply to
qualified mortgage insurance provided
by the Department of Veterans Affairs
or the Rural Housing Service.
Limit on the amount that is
deductible. The estate or trust cannot
deduct mortgage insurance premiums if
the estate’s or trust’s AGI is more than
$109,000. If the estate’s or trust’s AGI
is more than $100,000, its deduction is
limited and you must use the worksheet
below to figure the deduction. See How
to figure AGI for estates and trusts on
page 22 for information on figuring AGI.
Line 11—Taxes
Enter any deductible taxes paid or
incurred during the tax year that are not
deductible elsewhere on Form 1041.
Deductible taxes include the following.
• State and local income taxes. You
can deduct state and local income
taxes unless you elect to deduct state

Qualified Mortgage Insurance Premiums Deduction Worksheet Keep for Your Records

1. Enter the total premiums the estate or trust paid in 2008 for qualified mortgage insurance for a contract issued
after December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.
2. Enter the estate’s or trust’s AGI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.
3. Enter $100,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.
4. Is the amount on line 2 more than the amount on line 3?
No. The deduction is not limited. Include the amount from line 1 above on Form
1041, line 10. Do not complete the rest of this worksheet.
Yes. Subtract line 3 from line 2. If the result is not a multiple of $1,000, increase it to
the next multiple of $1,000. For example, increase $425 to $1,000, increase
$2,025 to $3,000, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.
5. Divide line 4 by $10,000. Enter the result as a decimal. If the result is 1.0 or more, enter 1.0 . . . . . . . . . . . . . 5. .
6. Multiply line 1 by line 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.
7. Qualified mortgage insurance premiums deduction. Subtract line 6 from line 1. Enter the result here and
include the amount on Form 1041, line 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.

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1041_Prep_Book_10.indb 154 10/19/2009 10:14:25 AM


and local general sales taxes. You
cannot deduct both.
• State and local general sales taxes.
You can elect to deduct state and local
general sales taxes instead of state and
local income taxes. Generally, you can
elect to deduct the actual state and
local general sales taxes (including
compensating use taxes) you paid in
2008 if the tax rate was the same as
the general sales tax rate. However,
sales taxes on food, clothing, medical
supplies, and motor vehicles are
deductible as a general sales tax even
if the tax rate was less than the general
sales tax rate. Sales taxes on motor
vehicles are also deductible as a
general sales tax if the tax rate was
more than the general sales tax rate,
but the tax is deductible only up to the
amount of tax that would have been
imposed at the general sales tax rate.
Motor vehicles include cars,
motorcycles, motor homes, recreational
vehicles, sport utility vehicles, trucks,
vans, and off-road vehicles. Also
include any state and local general
sales taxes paid for a leased motor
vehicle. Do not include sales taxes paid
on items used in a trade or business.
An estate or trust cannot use the
Optional Sales Tax Tables for
individuals in Pub. 600, State and Local
General Sales Taxes, to figure its
deduction.
• State, local, and foreign real property
taxes.
• State and local personal property
taxes.
• Foreign or U.S. possession income
taxes. You may want to take a credit for
the tax instead of a deduction. See the
instructions for Schedule G, line 2a, on
page 27 for more details.
• The generation-skipping transfer
(GST) tax imposed on income
distributions.
Do not deduct:
• Federal income taxes;
• Estate, inheritance, legacy,
succession, and gift taxes; or
• Federal duties and excise taxes.
Line 12—Fiduciary Fees
Enter the deductible fees paid or
incurred to the fiduciary for
administering the estate or trust during
the tax year.
Fiduciary fees deducted on
TIP Form 706 cannot be deducted
on Form 1041.
Line 15a—Other Deductions
Not Subject to the 2% Floor
Attach your own schedule, listing by
type and amount all allowable
deductions that are not deductible
elsewhere on Form 1041.
1041_Prep_Book_10.indb 155
Do not include any losses on
worthless bonds and similar obligations
and nonbusiness bad debts. Report
these losses on Schedule D (Form
1041).
Do not deduct medical or funeral
expenses on Form 1041. Medical
expenses of the decedent paid by the
estate may be deductible on the
decedent’s income tax return for the
year incurred. See section 213(c).
Funeral expenses are deductible only
on Form 706.
The following are examples of
deductions that are reported on line
15a.
Bond premium(s). For taxable bonds
acquired before October 23, 1986, if
the fiduciary elected to amortize the
premium, report the amortization on this
line. You cannot deduct the
amortization for tax-exempt bonds. If
you made the election to amortize the
premium, the basis in the taxable bond
must be reduced by the amount of
amortization.
For tax-exempt bonds, you cannot
deduct the premium that is amortized.
Although the premium cannot be
deducted, you must amortize the
premium and reduce the estate’s or
trust’s basis in the tax-exempt bond by
the amount of premium amortized. In
the case of a premium on a tax-exempt
bond, or if the fiduciary has made an
election to amortize the premium on a
taxable bond, the basis in the bond
must be reduced 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 deduction on a separate sheet and
attach it to Form 1041.
Casualty and theft losses. Use Form
4684, Casualties and Thefts, to figure
any deductible casualty and theft
losses.
Domestic production activities
deduction. The estate or trust may be
able to deduct up to 6% of its share of
qualified production activities income
(QPAI) from the following activities.
1. Construction performed in the
United States.
2. Engineering or architectural
services performed in the United States
for construction projects in the United
States.
3. Any lease, rental, license, sale,
exchange, or other disposition of:
a. Tangible personal property,
computer software, and sound
recordings that the estate or trust
manufactured, produced, grew, or
extracted in whole or in significant part
within the United States;
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INSTRUCTIONS FOR FORM 1041 155
b. Any qualified film the estate or
trust produced; or
c. Electricity, natural gas, or potable
water the estate or trust produced in
the United States.
In certain cases, the United States
includes the Commonwealth of Puerto
Rico.
The deduction does not apply to
income derived from:
• The sale of food and beverages the
estate or trust prepared at a retail
establishment;
• Property the estate or trust leased,
licensed, or rented for use by any
related person; or
• The transmission or distribution of
electricity, natural gas, or potable water.
The deduction cannot exceed 6% of
modified AGI or 50% of certain Form
W-2 wages. QPAI, as well as Form W-2
wages, must be apportioned between
the trust or estate and its beneficiaries.
For more details, see Form 8903,
Domestic Production Activities
Deduction, and its separate
instructions.
Net operating loss deduction
(NOLD). An estate or trust is allowed
the NOLD under section 172.
If you claim an NOLD for the estate
or trust, figure the deduction on a
separate sheet and attach it to this
return.
Estate’s or trust’s share of
amortization, depreciation, and
depletion not claimed elsewhere. If
you cannot deduct the amortization,
depreciation, and depletion as rent or
royalty expenses on Schedule E (Form
1040), or as business or farm expenses
on Schedule C, C-EZ, or F (Form
1040), itemize the fiduciary’s share of
the deductions on an attached sheet
and include them on line 15a. Itemize
each beneficiary’s share of the
deductions and report them in the
appropriate box of Schedule K-1 (Form
1041).
Line 15b—Allowable
Miscellaneous Itemized
Deductions Subject to the
2% Floor
Miscellaneous itemized deductions are
deductible only to the extent that the
aggregate amount of such deductions
exceeds 2% of AGI.
Among the miscellaneous itemized
deductions that must be included on
line 15b are expenses for the
production or collection of income
under section 212, such as investment
advisory fees, subscriptions to
investment advisory publications, and
the cost of safe deposit boxes.
Miscellaneous itemized deductions
do not include deductions for:
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 156 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
• Interest under section 163,
• Taxes under section 164,
• The amortization of bond premium
under section 171,
• Estate taxes attributable to IRD
under section 691(c), or
• Expenses paid or incurred in
connection with the administration of
the estate or trust that would not have
been incurred if the property were not
held in the estate or trust.
For other exceptions, see section
67(b).
How to figure AGI for estates and
trusts. You figure AGI by subtracting
the following from total income on line 9
of page 1:
1. The administration costs of the
estate or trust (the total of lines 12, 14,
and 15a to the extent they are costs
incurred in the administration of the
estate or trust) that would not have
been incurred if the property were not
held by the estate or trust;
2. The income distribution deduction
(line 18);
3. The amount of the exemption
(line 20);
4. The domestic production
activities deduction claimed on line 15a;
and
5. The NOLD claimed on line 15a.
For those estates and trusts whose
income distribution deduction is limited
to the actual distribution, and not the
DNI (that is, the income distribution is
less than the DNI), when computing the
AGI, use the amount of the actual
distribution.
For those estates and trusts whose
income distribution deduction is limited
to the DNI (that is, the actual
distribution exceeds the DNI), the DNI
must be figured taking into account the
allowable miscellaneous itemized
deductions (AMID) after application of
the 2% floor. In this situation there are
two unknown amounts: (a) the AMID
and (b) the DNI.
Computing line 15b. To compute line
15b, use the equation below:
AMID = Total miscellaneous
itemized deductions – (.02(AGI))
The following example illustrates
how algebraic equations can be used to
solve for these unknown amounts.
Example. The Malcolm Smith
Trust, a complex trust, earned $20,000
of dividend income, $20,000 of capital
gains, and a fully deductible $5,000
loss from XYZ partnership (chargeable
to corpus) in 2008. The trust instrument
provides that capital gains are added to
corpus. Fifty percent of the fiduciary
fees are allocated to income and 50%
to corpus. The trust claimed a $2,000
deduction on line 12 of Form 1041. The
trust incurred $1,500 of miscellaneous
1041_Prep_Book_10.indb 156
itemized deductions (chargeable to
income), which are subject to the 2%
floor. There are no other deductions.
The trustee made a discretionary
distribution of the accounting income of
$17,500 to the trust’s sole beneficiary.
Because the actual distribution can
reasonably be expected to exceed the
DNI, the trust must figure the DNI,
taking into account the allowable
miscellaneous itemized deductions, to
determine the amount to enter on line
15b.
The trust also claims an exemption
of $100 on line 20.
Using the facts in this 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 costs
incurred in the administration of the
estate or trust that would not have been
incurred if the property were not held by
the estate or trust) – (line 18) – (line
20).
Note. There are no other deductions
claimed by the trust on line 15a that are
deductible in arriving at AGI.
Figuring AGI in this example, we get:
AGI = 35,000 – 2,000 – DNI – 100
Since the value of line 18 is not
known because it is limited to the DNI,
you are left with the following:
AGI = 32,900 – DNI
Substitute 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
do this, compute the DNI using the
known values. In this example, the DNI
is equal to the total income of the trust
(less any capital gains allocated to
corpus or plus any capital loss from line
4); less total deductions from line 16
(excluding any miscellaneous itemized
deductions); less the AMID.
Thus, DNI = (line 9) – (line 15,
column (2) of Schedule D (Form 1041))
– (line 16) – (AMID)
Substitute the known values:
DNI = 35,000 – 20,000 – 2,000 –
AMID
DNI = 13,000 – AMID
Substitute 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 +
.02AMID)
AMID = 1,102 – .02AMID
-22-
1.02AMID = 1,102
AMID = 1,080
DNI = 11,920 (i.e., 13,000 – 1,080)
AGI = 20,980 (i.e., 32,900 – 11,920)
Note. The income distribution
deduction is 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 7 of
Schedule B) and complete the rest of
Form 1041 according to the
instructions.
If the 2% floor is more than the
deductions subject to the 2% floor, no
deductions are allowed.
Line 18—Income
Distribution Deduction
If the estate or trust was required to
distribute income currently or if it paid,
credited, or was required to distribute
any other amounts to beneficiaries
during the tax year, complete Schedule
B to determine the estate’s or trust’s
income distribution deduction.
However, if you are filing for a pooled
income fund, do not complete Schedule
B. Instead, attach a statement to
support the computation of the income
distribution deduction.
If the estate or trust claims an
income distribution deduction, complete
and attach:
• Part I (through line 26) and Part II of
Schedule I (Form 1041) to refigure the
deduction on a minimum tax basis, and
• Schedule K-1 (Form 1041) for each
beneficiary to which a distribution was
made or required to be made.
Cemetery perpetual care fund. On
line 18, deduct the amount, not more
than $5 per gravesite, paid for
maintenance of cemetery property. To
the right of the entry space for line 18,
enter the number of gravesites. Also
write “Section 642(i) trust” in
parentheses after the trust’s name at
the top of Form 1041. You do not have
to complete Schedules B of Form 1041
and K-1 (Form 1041).
Do not enter less than zero on line
18.
Line 19—Estate Tax
Deduction (Including Certain
Generation-Skipping
Transfer Taxes)
If the estate or trust includes IRD in its
gross income, and such amount was
included in the decedent’s gross estate
for estate tax purposes, the estate or
trust is allowed to deduct in the same
tax year that the income is included that
portion of the estate tax imposed on the
decedent’s estate that is attributable to
the inclusion of the IRD in the
10/19/2009 10:14:26 AM
 INSTRUCTIONS FOR FORM 1041 157

decedent’s estate. For an example of
the computation, see Regulations
section 1.691(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 IRD received by the estate
or trust, do not include such amounts in
determining the estate tax deduction for
the estate or trust. Figure the deduction
on a separate sheet. Attach the sheet
to your return.
If you claim a deduction for
! estate tax attributable to
CAUTION qualified dividends or capital
gains, you may have to adjust the
amount on Form 1041, page 1, line
2b(2), or Schedule D (Form 1041), line
18.
Also, a deduction is allowed for the
GST tax imposed as a result of a
taxable termination or a direct skip
occurring as a result of the death of the
transferor. See section 691(c)(3). Enter
the estate’s or trust’s share of these
deductions on line 19.
Line 20—Exemption
Decedents’ estates. A decedent’s
estate is allowed a $600 exemption.
Trusts required to distribute all
income currently. A trust whose
governing instrument requires that all
income be distributed currently is
allowed a $300 exemption, even if it
distributed amounts other than income
during the tax year.
Qualified disability trusts. A qualified
disability trust is allowed a $3,500
exemption if the trust’s modified AGI is
less than or equal to $159,950. If its
modified AGI exceeds $159,950,
complete the worksheet below to figure
the amount of the trust’s exemption. To
figure modified AGI, follow the
instructions for figuring AGI for line 15b
on page 21, except use zero as the
amount of the trust’s exemption when
figuring AGI.
A qualified disability trust is any trust:
1. Described in 42 U.S.C.
1396p(c)(2)(B)(iv) and established
solely for the benefit of an individual
under 65 years of age who is disabled,
and
2. All of the beneficiaries of which
are determined by the Commissioner of
Social Security to have been disabled
for some part of the tax year within the
meaning of 42 U.S.C. 1382c(a)(3).
A trust will not fail to meet item 2
above just because the trust’s corpus
may revert to a person who is not
disabled after the trust ceases to have
any disabled beneficiaries.
All other trusts. A trust not described
above is allowed a $100 exemption.
Tax and Payments
Line 22—Taxable Income
Minimum taxable income. Line 22
cannot be less than the larger of:
• The inversion gain of the estate or
trust, as figured under section 7874, if
the estate or trust is an expatriated
entity or a partner in an expatriated
entity, or
• The sum of the excess inclusions of
the estate or trust from Schedule Q
(Form 1066), line 2c.
NOL. If line 22 (figured without regard
to the minimum taxable income rule
stated above) is a loss, the estate or
trust may have an NOL. Do not include
the deductions claimed on lines 13, 18,
and 20 when figuring the amount of the
NOL.
Generally, an NOL may be carried
back to the prior 2 tax years (3 years to
the extent the loss is an eligible loss; 5
years to the extent the loss is a farming
loss; 10 years to the extent the loss is a
specified liability loss). An estate or
trust may also elect to carry an NOL
forward only, instead of first carrying it
back. For more information, see the
Instructions for Form 1045, Application
for Tentative Refund.
Complete Schedule A of Form 1045
to figure the amount of the NOL that is
available for carryback or carryover.
Use Form 1045 or file an amended
return to apply for a refund based on an
NOL carryback. For more details, see
Pub. 536, Net Operating Losses
(NOLs) for Individuals, Estates, and
Trusts.
On the termination of the estate or
trust, any unused NOL carryover that
would be allowable to the estate or trust
in a later tax year, but for the
termination, is allowed to the
beneficiaries succeeding to the property
of the estate or trust. See the

Exemption Worksheet for Qualified Disability Trusts

Only—Line 20 Keep for Your Records

Note: If the trust’s modified AGI* is less than or equal to $159,950, enter $3,500 on Form 1041, line 20.
Otherwise, complete the worksheet below to figure the trust’s exemption.

1. Maximum exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. $3,500

2. Enter the trust’s modified AGI* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.
3. Threshold amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. $159,950
4. Subtract line 3 from line 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.
Note: If line 4 is more than $122,500, enter $2,333 on line 9 below. Do not complete lines 5
through 8.
5. Divide line 4 by $2,500. If the result is not a whole number, increase it to the next higher
whole number (for example, increase 0.0004 to 1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.
6. Multiply line 5 by 2% (.02) and enter the result as a decimal . . . . . . . . . . . . . . . . . . . . . 6.
7. Multiply line 1 by line 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.
8. Divide line 7 by 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.
9. Exemption. Subtract line 8 from line 1. Enter the result here and on Form 1041, line 20 . . . . . . . . . . . . . . . 9.

*Figure the trust’s modified AGI in the same manner as AGI is figured in the line 15b instructions on page 21,
except use zero when figuring the amount of the trust’s exemption.

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1041_Prep_Book_10.indb 157 10/19/2009 10:14:26 AM

 158 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
instructions for Schedule K-1, box 11,
codes D and E.
Excess deductions on termination.
If the estate or trust has for its final year
deductions (excluding the charitable
deduction and exemption) in excess of
its gross income, the excess is allowed
as an itemized deduction to the
beneficiaries succeeding to the property
of the estate or trust.
In general, an unused NOL
carryover that is allowed to
beneficiaries (as explained above)
cannot also be treated as an excess
deduction. However, if the final year of
the estate or trust is also the last year
of the NOL carryover period, the NOL
carryover not absorbed in that tax year
by the estate or trust is included as an
excess deduction. See the instructions
for Schedule K-1, box 11, code A.
Line 24a—2008 Estimated
Tax Payments and Amount
Applied From 2007 Return
Enter the amount of any estimated tax
payment you made with Form 1041-ES
for 2008 plus the amount of any
overpayment from the 2007 return that
was applied to the 2008 estimated tax.
If the estate or trust is the beneficiary
of another trust and received a
payment of estimated tax that was
credited to the trust (as reflected on the
Schedule K-1 issued to the trust), then
report this amount separately with the
notation “section 643(g)” in the space
next to line 24a and include this amount
in the amount entered on line 24a.
Do not include on Form 1041
! estimated tax paid by an
CAUTION individual before death. Instead,
include those payments on the
decedent’s final income tax return.
Line 24b—Estimated Tax
Payments Allocated to
Beneficiaries
The trustee (or executor, for the final
year of the estate) may elect under
section 643(g) to have any portion of its
estimated tax treated as a payment of
estimated tax made by a beneficiary or
beneficiaries. The election is made on
Form 1041-T, Allocation of Estimated
Tax Payments to Beneficiaries, which
must be filed by the 65th day after the
close of the trust’s tax year. Form
1041-T shows the amounts to be
allocated to each beneficiary. This
amount is reported on the beneficiary’s
Schedule K-1, box 13, using code A.
Attach Form 1041-T to your return
only if you have not yet filed it;
however, attaching Form 1041-T to
Form 1041 does not extend the due
date for filing Form 1041-T. If you have
1041_Prep_Book_10.indb 158
already filed Form 1041-T, do not
attach a copy to your return.
Failure to file Form 1041-T by
! the due date (March 6, 2009, for
CAUTION calendar year estates and
trusts) will result in an invalid election.
An invalid election will require the filing
of amended Schedules K-1 for each
beneficiary who was allocated a
payment of estimated tax.
Line 24d—Tax Paid With
Form 7004
If you filed Form 7004 to request an
extension of time to file Form 1041,
enter the amount that you paid with the
extension request.
Line 24e—Federal Income
Tax Withheld
Use line 24e to claim a credit for any
federal income tax withheld (and not
repaid) by: (a) an employer on wages
and salaries of a decedent received by
the decedent’s estate; (b) a payer of
certain gambling winnings (for example,
state lottery winnings); or (c) a payer of
distributions from pensions, annuities,
retirement or profit-sharing plans, IRAs,
insurance contracts, etc., received by a
decedent’s estate or trust. Attach a
copy of Form W-2, Form W-2G, or
Form 1099-R to the front of the return.
Except for backup withholding
! (as explained below), withheld
CAUTION income tax may not be passed
through to beneficiaries on either
Schedule K-1 or Form 1041-T.
Backup withholding. If the estate or
trust received a 2008 Form 1099
showing federal income tax withheld
(that is, backup withholding) on interest
income, dividends, or other income,
check the box and include the amount
withheld on income retained by the
estate or trust in the total for line 24e.
Report on Schedule K-1 (Form
1041), box 13, using code B, any credit
for backup withholding on income
distributed to the beneficiary.
Line 24f—Credit for Tax Paid
on Undistributed Capital
Gains
Attach Copy B of Form 2439, Notice to
Shareholder of Undistributed
Long-Term Capital Gains.
Line 24g—Credit for Federal
Tax on Fuels
Enter any credit for federal excise taxes
paid on fuels that are ultimately used
for nontaxable purposes (for example,
an off-highway business use). Attach
Form 4136, Credit for Federal Tax Paid
on Fuels. See Pub. 510, Excise Taxes,
for more information.
-24-
Line 26—Estimated Tax
Penalty
If line 27 is at least $1,000 and more
than 10% of the tax shown on Form
1041, or the estate or trust underpaid
its 2008 estimated tax liability for any
payment period, it may owe a penalty.
See Form 2210 to determine whether
the estate or trust owes a penalty and
to figure the amount of the penalty.
Note. The penalty may be waived
under certain conditions. See Pub. 505,
Tax Withholding and Estimated Tax, for
details.
Line 27—Tax Due
You must pay the tax in full when the
return is filed. Make the check or
money order payable to the “United
States Treasury.” Write the EIN and
“2008 Form 1041” on the payment.
Enclose, but do not attach, the payment
with Form 1041.
You may use EFTPS to pay the
TIP tax due for a trust. See
Electronic Deposits on page 8.
Line 29a—Credited to 2009
Estimated Tax
Enter the amount from line 28 that you
want applied to the estate’s or trust’s
2009 estimated tax.
Schedule A—Charitable
Deduction
General Instructions
Generally, any part of the gross income
of an estate or trust (other than a
simple trust) that, under the terms of
the will or governing instrument, is paid
(or treated as paid) during the tax year
for a charitable purpose specified in
section 170(c) is allowed as a
deduction to the estate or trust. It is not
necessary that the charitable
organization be created or organized in
the United States.
A pooled income fund or a section
4947(a)(1) nonexempt charitable trust
treated as a private foundation must
attach a separate sheet to Form 1041
instead of using Schedule A of Form
1041 to figure the charitable deduction.
Additional return to be filed by
trusts. Trusts, other than split-interest
trusts or nonexempt charitable trusts,
that claim a charitable deduction also
file Form 1041-A unless the trust is
required to distribute currently to the
beneficiaries all the income for the year
determined under section 643(b) and
related regulations.
Pooled income funds and charitable
lead trusts also file Form 5227. See
10/19/2009 10:14:26 AM

Form 5227 for information about any
exceptions.
Election to treat contributions as
paid in the prior tax year. The
fiduciary of an estate or trust may elect
to treat as paid during the tax year any
amount of gross income received
during that tax year or any prior tax
year that was paid in the next tax year
for a charitable purpose.
For example, if a calendar year
estate or trust makes a qualified
charitable contribution on February 7,
2009, from income earned in 2008 or
prior, then the fiduciary can elect to
treat the contribution as paid in 2008.
To make the election, the fiduciary
must file a statement with Form 1041
for the tax year in which the
contribution is treated as paid. This
statement must include:
1. The name and address of the
fiduciary;
2. The name of the estate or trust;
3. An indication that the fiduciary is
making an election under section
642(c)(1) for contributions treated as
paid during such tax year;
4. The name and address of each
organization to which any such
contribution is paid; and
5. The amount of each contribution
and date of actual payment or, if
applicable, the total amount of
contributions paid to each organization
during the next tax year, to be treated
as paid in the prior tax year.
The election must be filed by the due
date (including extensions) for Form
1041 for the next tax year. If the original
return was filed on time, you may make
the election on an amended return filed
no later than 6 months after the due
date of the return (excluding
extensions). Write “Filed pursuant to
section 301.9100-2” at the top of the
amended return and file it at the same
address you used for your original
return.
For more information about the
charitable deduction, see section 642(c)
and related regulations.
Specific Instructions
Line 1—Amounts Paid or
Permanently Set Aside for
Charitable Purposes From
Gross Income
Enter amounts that were paid for a
charitable purpose out of the estate’s or
trust’s gross income, including any
capital gains that are attributable to
income under the governing instrument
or local law. Include amounts paid
during the tax year from gross income
received in a prior tax year, but only if
no deduction was allowed for any prior
tax year for these amounts.
1041_Prep_Book_10.indb 159
Estates, and certain trusts, may
claim a deduction for amounts
permanently set aside for a charitable
purpose from gross income. Such
amounts must be permanently set
aside during the tax year to be used
exclusively for religious, charitable,
scientific, literary, or educational
purposes, or for the prevention of
cruelty to children or animals, or for the
establishment, acquisition,
maintenance, or operation of a public
cemetery not operated for profit.
For a trust to qualify, the trust may
not be a simple trust, and the set aside
amounts must be required by the terms
of a trust instrument that was created
on or before October 9, 1969.
Further, the trust instrument must
provide for an irrevocable remainder
interest to be transferred to or for the
use of an organization described in
section 170(c); or the trust must have
been created by a grantor who was at
all times after October 9, 1969, under a
mental disability to change the terms of
the trust.
Also, certain testamentary trusts that
were established by a will that was
executed on or before October 9, 1969,
may qualify. See Regulations section
1.642(c)-2(b).
Do not include any capital gains for
the tax year allocated to corpus and
paid or permanently set aside for
charitable purposes. Instead, enter
these amounts on line 4.
Line 2—Tax-Exempt Income
Allocable to Charitable
Contributions
Any estate or trust that pays or sets
aside any part of its income for a
charitable purpose must reduce the
deduction by the portion allocable to
any tax-exempt income. If the
governing instrument specifically
provides as to the source from which
amounts are paid, permanently set
aside, or to be used for charitable
purposes, the specific provisions
control. In all other cases, determine
the amount of tax-exempt income
allocable to charitable contributions by
multiplying line 1 by a fraction, the
numerator of which is the total
tax-exempt income of the estate or
trust, and the denominator of which is
the gross income of the estate or trust.
Do not include in the denominator any
losses allocated to corpus.
Line 4—Capital Gains for the
Tax Year Allocated to Corpus
and Paid or Permanently Set
Aside for Charitable Purposes
Enter the total of all capital gains for the
tax year that are:
-25-
INSTRUCTIONS FOR FORM 1041 159
• Allocated to corpus, and
• Paid or permanently set aside for
charitable purposes.
Line 6—Section 1202 Exclusion
Allocable to Capital Gains Paid
or Permanently Set Aside for
Charitable Purposes
If the exclusion of gain from the sale or
exchange of qualified small business
(QSB) stock was claimed, enter the part
of the gain included on Schedule A,
lines 1 and 4, that was excluded under
section 1202.
Schedule B—Income
Distribution Deduction
General Instructions
If the estate or trust was required to
distribute income currently or if it paid,
credited, or was required to distribute
any other amounts to beneficiaries
during the tax year, complete Schedule
B to determine the estate’s or trust’s
income distribution deduction.
Note. Use Schedule I (Form 1041) to
compute the DNI and income
distribution deduction on a minimum tax
basis.
Pooled income funds. Do not
complete Schedule B for these funds.
Instead, attach a separate statement to
support the computation of the income
distribution deduction. See Pooled
Income Funds on page 12 for more
information.
Separate share rule. If a single trust
or an estate has more than one
beneficiary, and if different beneficiaries
have substantially separate and
independent shares, their shares are
treated as separate trusts or estates for
the sole purpose of determining the
DNI allocable to the respective
beneficiaries.
If the separate share rule applies,
figure the DNI allocable to each
beneficiary on a separate sheet and
attach the sheet to this return. Any
deduction or loss that is applicable
solely to one separate share of the trust
or estate is not available to any other
share of the same trust or estate.
For more information, see section
663(c) and related regulations.
Withholding of tax on foreign
persons. The fiduciary may be liable
for withholding tax on distributions to
beneficiaries who are foreign persons.
For more information, see Pub. 515,
Withholding of Tax on Nonresident
Aliens and Foreign Entities, and Forms
1042 and 1042-S.
10/19/2009 10:14:27 AM
 160 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
Specific Instructions
Line 1—Adjusted Total Income
Generally, enter on line 1, Schedule B,
the amount from line 17 on page 1 of
Form 1041. However, if both line 4 and
line 17 on page 1 of Form 1041 are
losses, enter on line 1, Schedule B, the
smaller of those losses. If line 4 is zero
or a gain and line 17 is a loss, enter
zero on line 1, Schedule B.
If you are filing for a simple trust,
subtract from adjusted total income any
extraordinary dividends or taxable stock
dividends included on page 1, line 2,
and determined under the governing
instrument and applicable local law to
be allocable to corpus.
Line 2—Adjusted Tax-Exempt
Interest
To figure the adjusted tax-exempt
interest:
Step 1. Add tax-exempt interest
income on line 2 of Schedule A, any
expenses allowable under section 212
allocable to tax-exempt interest, and
any interest expense allocable to
tax-exempt interest.
Step 2. Subtract the Step 1 total
from the amount of tax-exempt interest
(including exempt-interest dividends)
received.
Section 212 expenses that are
directly allocable to tax-exempt interest
are allocated only to tax-exempt
interest. A reasonable proportion of
section 212 expenses that are indirectly
allocable to both tax-exempt interest
and other income must be allocated to
each class of income.
Figure the interest expense allocable
to tax-exempt interest according to the
guidelines in Rev. Proc. 72-18, 1972-1
C.B. 740.
See Regulations sections 1.643(a)-5
and 1.265-1 for more information.
Line 3
Include all capital gains, whether or not
distributed, that are attributable to
income under the governing instrument
or local law. For example, if the trustee
distributed 50% of the current year’s
capital gains to the income
beneficiaries (and reflects this amount
in column (1), line 15 of Schedule D
(Form 1041)), but under the governing
instrument all capital gains are
attributable to income, then include
100% of the capital gains on line 3. If
the amount on Schedule D (Form
1041), line 15, column (1) is a net loss,
enter zero.
If the exclusion of gain from the sale
or exchange of QSB stock was
claimed, do not reduce the gain on line
3 by any amount excluded under
section 1202.
1041_Prep_Book_10.indb 160
Line 5
In figuring the amount of long-term and
short-term capital gain for the tax year
included on Schedule A, line 1, the
specific provisions of the governing
instrument control if the instrument
specifically provides as to the source
from which amounts are paid,
permanently set aside, or to be used for
charitable purposes.
In all other cases, determine the
amount to enter by multiplying line 1 of
Schedule A by a fraction, the numerator
of which is the amount of net capital
gains that are included in the
accounting income of the estate or trust
(that is, not allocated to corpus) and are
distributed to charities, and the
denominator of which is all items of
income (including the amount of such
net capital gains) included in the DNI.
Reduce the amount on line 5 by any
allocable section 1202 exclusion.
Line 8—Accounting Income
If you are filing for a decedent’s estate
or a simple trust, skip this line. If you
are filing for a complex trust, enter the
income for the tax year determined
under the terms of the governing
instrument and applicable local law. Do
not include extraordinary dividends or
taxable stock dividends determined
under the governing instrument and
applicable local law to be allocable to
corpus.
Lines 9 and 10
Do not include any:
• Amounts deducted on prior year’s
return that were required to be
distributed in the prior year;
• Amount that is properly paid or
credited as a gift or bequest of a
specific amount of money or specific
property. (To qualify as a gift or
bequest, the amount must be paid in
three or fewer installments.) An amount
that can be paid or credited only from
income is not considered a gift or
bequest; or
• Amount paid or permanently set
aside for charitable purposes or
otherwise qualifying for the charitable
deduction.
Line 9—Income Required To Be
Distributed Currently
Line 9 is to be completed by all simple
trusts as well as complex trusts and
decedent’s estates that are required to
distribute income currently, whether it is
distributed or not. The determination of
whether trust income is required to be
distributed currently depends on the
terms of the governing instrument and
the applicable local law.
The line 9 distributions are referred
to as first tier distributions and are
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deductible by the estate or trust to the
extent of the DNI. The beneficiary
includes such amounts in his or her
income to the extent of his or her
proportionate share of the DNI.
Line 10—Other Amounts Paid,
Credited, or Otherwise
Required To Be Distributed
Line 10 is to be completed only by a
decedent’s estate or complex trust.
These distributions consist of any other
amounts paid, credited, or required to
be distributed and are referred to as
second tier distributions. Such amounts
include annuities to the extent not paid
out of income, mandatory and
discretionary distributions of corpus,
and distributions of property in kind.
If Form 1041-T was timely filed to
elect to treat estimated tax payments
as made by a beneficiary, the
payments are treated as paid or
credited to the beneficiary on the last
day of the tax year and must be
included on line 10.
Unless a section 643(e)(3) election
is made, the value of all noncash
property actually paid, credited, or
required to be distributed to any
beneficiaries is the smaller of:
1. The estate’s or trust’s adjusted
basis in the property immediately
before distribution, plus any gain or
minus any loss recognized by the
estate or trust on the distribution (basis
of beneficiary), or
2. The FMV of such property.
If a section 643(e)(3) election is made
by the fiduciary, then the amount
entered on line 10 will be the FMV of
the property.
A fiduciary of a complex trust or a
decedent’s estate may elect to treat
any amount paid or credited to a
beneficiary within 65 days following the
close of the tax year as being paid or
credited on the last day of that tax year.
To make this election, see the
instructions for Question 6 on page 30.
The beneficiary includes the
amounts on line 10 in his or her income
only to the extent of his or her
proportionate share of the DNI.
Complex trusts. If the second tier
distributions exceed the DNI allocable
to the second tier, the trust may have
an accumulation distribution. See the
line 11 instructions below.
Line 11—Total Distributions
If line 11 is more than line 8, and you
are filing for a complex trust that has
previously accumulated income, see
the instructions on page 30 to see if
you must complete Schedule J (Form
1041).
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 INSTRUCTIONS FOR FORM 1041 161

Line 12—Adjustment for
Tax-Exempt Income
In figuring the income distribution
deduction, the estate or trust is not
allowed a deduction for any item of the
DNI that is not included in the gross
income of the estate or trust. Thus, for
purposes of figuring the allowable
income distribution deduction, the DNI
(line 7) is figured without regard to any
tax-exempt interest.
If tax-exempt interest is the only
tax-exempt income included in the total
distributions (line 11), and the DNI (line
7) is less than or equal to line 11, then
enter on line 12 the amount from line 2.
If tax-exempt interest is the only
tax-exempt income included in the total
distributions (line 11), and the DNI is
more than line 11 (that is, the estate or
trust made a distribution that is less
than the DNI), then figure the
adjustment by multiplying line 2 by a
fraction, the numerator of which is the
total distributions (line 11), and the
denominator of which is the DNI (line
7). Enter the result on line 12.
If line 11 includes tax-exempt
income other than tax-exempt interest,
figure line 12 by subtracting the total of
the following from tax-exempt income
included on line 11:
1. The charitable contribution
deduction allocable to such tax-exempt
income, and
2. Expenses allocable to tax-exempt
income.
Expenses that are directly allocable estate’s or trust’s tax if the estate or
to tax-exempt income are allocated only trust files Schedule D (Form 1041) and
to tax-exempt income. A reasonable has:
proportion of expenses indirectly • A net capital gain and any taxable
allocable to both tax-exempt income income, or
and other income must be allocated to • Qualified dividends on line 2b(2) of
each class of income. Form 1041 and any taxable income.
Qualified Dividends Tax Worksheet.
If you do not have to complete Part I or
Schedule G—Tax Part II of Schedule D and the estate or
trust has an amount entered on line
Computation 2b(2) of Form 1041 and any taxable
income (line 22), then figure the
Line 1a estate’s or trust’s tax using the
worksheet below and enter the tax on
2008 tax rate schedule. For tax years
line 1a.
beginning in 2008, figure the tax using
the Tax Rate Schedule below and enter Note. You must reduce the amount
the tax on line 1a. However, see the you enter on line 2b(2) of Form 1041 by
instructions for Schedule D (Form the portion of the section 691(c)
1041) and the Qualified Dividends Tax deduction claimed on line 19 of Form
Worksheet below. 1041 if the estate or trust received
qualified dividends that were IRD.
2008 Tax Rate Schedule Line 1c — AMT. Attach Schedule I
(Form 1041) if:
If taxable
income • The estate or trust must complete
is: Schedule B.
But not
Of the • The estate or trust claims a credit on
Over —
over —
Its tax is: amount
line 2b, 2c, or 2d of Schedule G.
over —
$0 $2,200 15% $0 • The estate’s or trust’s share of
2,200 5,150 $330.00 + 25% 2,200 alternative minimum taxable income
5,150 7,850 1,067.50 + 28% 5,150 (line 29 of Schedule I (Form 1041))
7,850 10,700 1,823.50 + 33% 7,850 exceeds $22,500.
10,700 ----- 2,764.00 + 35% 10,700
Enter the amount from line 56 of
Schedule I (Form 1041) on line lc.
Schedule D (Form 1041) and Line 2a—Foreign Tax Credit
Schedule D Tax Worksheet. Use Attach Form 1116, Foreign Tax Credit
Part V of Schedule D (Form 1041) or (Individual, Estate, or Trust), if you elect
the Schedule D Tax Worksheet, to claim credit for income or profits
whichever is applicable, to figure the taxes paid or accrued to a foreign

Qualified Dividends Tax Worksheet—Schedule G, line 1a Keep for Your Records

Caution: Do not use this worksheet if the estate or trust must complete Schedule D (Form 1041).

1. Enter the amount from Form 1041, line 22 . . . . . . . . . . . . . . . . . . . ....... 1.

2. Enter the amount from Form 1041, line 2b(2) . . . . . . . . 2.
3. If you are claiming investment interest expense on Form
4952, enter the amount from line 4g; otherwise enter -0- 3.
4. Subtract line 3 from line 2. If zero or less, enter -0- . . . . . . . . . . . . . ....... 4.
5. Subtract line 4 from line 1. If zero or less, enter -0- . . . . . . . . . . . . . ....... 5.
6. Enter the smaller of the amount on line 1 or $2,200 . . . . . . . . . . . . ....... 6.
7. Is the amount on line 5 equal to or more than the amount on line 6?
Yes. Skip lines 7 and 8; go to line 9 and check the ‘‘No’’ box.
No. Enter the amount from line 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.
8. Subtract line 7 from line 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.
9. Are the amounts on lines 4 and 8 the same?
Yes. Skip lines 9 through 12; go to line 13.
No. Enter the smaller of line 1 or line 4 . . . . . . . . . . . . . . . . . . . . . . . . 9.
10. Enter the amount from line 8 (if line 8 is blank, enter -0-) . . . . . . . . . . . . . . . . 10.
11. Subtract line 10 from line 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.
12. Multiply line 11 by 15% (.15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.
13. Figure the tax on the amount on line 5. Use the 2008 Tax Rate Schedule . . . . . . . . . . . . . . . . . . . 13.
14. Add lines 12 and 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.
15. Figure the tax on the amount on line 1. Use the 2008 Tax Rate Schedule . . . . . . . . . . . . . . . . . . . 15.
16. Tax on all taxable income. Enter the smaller of line 14 or line 15 here and on Sch. G, line 1a . . . . 16.

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1041_Prep_Book_10.indb 161 10/19/2009 10:14:27 AM

 162 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
country or a U.S. possession. The
estate or trust may claim credit for that
part of the foreign taxes not allocable to
the beneficiaries (including charitable
beneficiaries). Enter the estate’s or
trust’s share of the credit on line 2a.
See Pub. 514, Foreign Tax Credit for
Individuals, for details.
Line 2b—Other Nonbusiness
Credits
Alternative motor vehicle credit.
Complete and attach Form 8910,
Alternative Motor Vehicle Credit, if the
estate claims a credit for alternative
motor vehicles. Include the credit for
nondepreciable property on line 2b.
Alternative fuel vehicle refueling
property credit. Complete and attach
Form 8911, Alternative Fuel Vehicle
Refueling Property Credit, if the estate
claims a credit for alternative fuel
vehicle refueling property. Include the
credit for nondepreciable property on
line 2b.
Line 2c—General Business
Credit
Do not include any amounts that
! are allocated to a beneficiary.
CAUTION Credits that are allocated
between the estate or trust and the
beneficiaries are listed in the
instructions for Schedule K-1, box 13,
on page 35. Generally, these credits
are apportioned on the basis of the
income allocable to the estate or trust
and the beneficiaries.
Enter on line 2c the estate’s or
trust’s total general business credit
allowed for the current year from line 32
of Form 3800. The estate or trust must
file Form 3800 to claim any of the
general business credits. If the estate’s
or trust’s only source of credits listed on
Part I for Form 3800 is from
passthrough entities, you may not be
required to complete the source credit
form. See the Instructions for Form
3800 for more information.
The following general business
credits appear on Part I of Form 3800.
• Investment credit (Form 3468, Part II
only).
• Welfare-to-work credit (Form 8861).
• Credit for increasing research
activities (Form 6765).
• Low-income housing credit (Form
8586, Part I).
• Disabled access credit (Form 8826).
• Renewable electricity, refined coal,
and Indian coal production credit (Form
8835, Part I only).
• Indian employment credit (Form
8845).
• Orphan drug credit (Form 8820).
• New markets credit (Form 8874).
• Credit for small employer pension
plan startup costs (Form 8881).
1041_Prep_Book_10.indb 162
• Credit for employer-provided child
care facilities and services (Form
8882).
• Biodiesel and renewable diesel fuels
credit (Form 8864).
• Low sulfur diesel fuel production
credit (Form 8896).
• Distilled spirits credit (Form 8906).
• Nonconventional source fuel credit
(Form 8907).
• Energy efficient home credit (Form
8908).
• Energy efficient appliance credit
(Form 8909).
• Alternative motor vehicle credit (Form
8910).
• Alternative fuel vehicle refueling
property credit (Form 8911).
• Credits for affected Midwestern
disaster area employers (Form
5884-A).
• Mine rescue team training credit
(Form 8923).
• Agricultural chemicals security credit
(Form 8931).
• Credit for employer differential wage
payments (Form 8932).
• Carbon dioxide sequestration credit
(Form 8933).
• Credit for contributions to selected
community development corporations
(Form 8847).
• General credits from an electing
large partnership. Report these credits
on Form 3800, line 1z.
The following general business
credits have special tax liability limits.
These limits are now figured in Part II of
Form 3800. See the Instructions for
Form 3800 for more information.
• Empowerment zone and renewal
community employment credit (Form
8844).
• Investment credit (Form 3468, Part III
only).
• Work opportunity credit (Form 5884).
• Alcohol and cellulosic biofuel fuels
credit (Form 6478).
• Renewable electricity, refined coal,
and Indian coal production credit (Form
8835, Part II).
• Credit for employer social security
and Medicare taxes (Form 8846).
• Qualified railroad track maintenance
credit (Form 8900).
• Low-income housing credit (Form
8586, Part II).
Line 2d—Credit for Prior
Year Minimum Tax
An estate or trust that paid AMT in a
previous year may be eligible for a
minimum tax credit in 2008. See Form
8801, Credit for Prior Year Minimum
Tax — Individuals, Estates, and Trusts.
Line 3—Total Credits
Credit to holders of tax credit bonds.
Complete and attach Form 8912, Credit
to Holders of Tax Credit Bonds, if the
-28-
estate or trust claims a credit for
holding a qualified energy conservation
bond, clean renewable energy bond,
Gulf tax credit bond, Midwestern tax
credit bond, qualified forestry
conservation bond, or qualified zone
academy bond. Include the credit on
line 3. On the dotted line to the left of
the entry, write “Form 8912” and the
amount of the credit. Also, be sure to
include the credit in interest income.
Line 5—Recapture Taxes
Recapture of investment credit. If
the estate or trust disposed of
investment credit property or changed
its use before the end of the recapture
period, see Form 4255, Recapture of
Investment Credit, to figure the
recapture tax allocable to the estate or
trust.
Recapture of low-income housing
credit. If the estate or trust disposed
of property (or there was a reduction in
the qualified basis of the property) on
which the low-income housing credit
was claimed, see Form 8611,
Recapture of Low-Income Housing
Credit, to figure any recapture tax
allocable to the estate or trust.
Recapture of qualified electric
vehicle credit. If the estate or trust
claimed the qualified electric vehicle
credit in a prior tax year for a vehicle
that ceased to qualify for the credit, part
or all of the credit may have to be
recaptured. See Pub. 535 for details. If
the estate or trust owes any recapture
tax, include it on line 5 and write
“QEVCR” on the dotted line to the left
of the entry space.
Recapture of the Indian employment
credit. Generally, if the estate or trust
terminates a qualified employee less
than 1 year after the date of initial
employment, any Indian employment
credit allowed for a prior tax year by
reason of wages paid or incurred to that
employee must be recaptured. See
Form 8845 for details. If the estate or
trust owes any recapture tax, include it
on line 5 and write “IECR” on the dotted
line to the left of the entry space.
Recapture of the new markets credit.
If the estate or trust owes any new
markets recapture tax, include it on line
5 and write “NMCR” on the dotted line
to the left of the entry space. For more
information, including how to figure the
recapture amount, see section 45D(g).
Recapture of the credit for
employer-provided child care
facilities. If the facility ceased to
operate as a qualified child care facility
or there was a change in ownership,
part or all of the credit may have to be
recaptured. See Form 8882 for details.
If the estate or trust owes any recapture
tax, include it on line 5 and write
10/19/2009 10:14:28 AM

“ECCFR” on the dotted line to the left of
the entry space.
Recapture of the alternative motor
vehicle credit and the alternative fuel
vehicle refueling property credit.
See section 30B(h)(8) or section
30C(e)(5), whichever is applicable, for
details.
Line 6—Household
Employment Taxes
If any of the following apply, get
Schedule H (Form 1040), Household
Employment Taxes, and its instructions,
to see if the estate or trust owes these
taxes.
1. The estate or trust paid any one
household employee cash wages of
$1,600 or more in 2008. Cash wages
include wages paid by checks, money
orders, etc. When figuring the amount
of cash wages paid, combine cash
wages paid by the estate or trust with
cash wages paid to the household
employee in the same calendar year by
the household of the decedent or
beneficiary for whom the administrator,
executor, or trustee of the estate or
trust is acting.
2. The estate or trust withheld
federal income tax during 2008 at the
request of any household employee.
3. The estate or trust paid total cash
wages of $1,000 or more in any
calendar quarter of 2007 or 2008 to
household employees.
Note. See Amended Schedule H
(Form 1040) under F. Initial Return,
Amended Return, etc., earlier for
information on filing an amended
Schedule H (Form 1040) for a Form
1041.
Line 7—Total Tax
Tax on ESBTs. Attach the tax
computation to the return. To the left of
the line 7 entry space, write “Sec.
641(c)” and the amount of tax on the S
corporation items. Include this amount
in the total tax on line 7.
See Electing Small Business Trusts
(ESBTs) on page 12 for the special tax
computation rules that apply to the
portion of an ESBT consisting of stock
in one or more S corporations.
Interest on deferred tax attributable
to installment sales of certain
timeshares and residential lots and
certain nondealer real property
installment obligations. If an
obligation arising from the disposition of
real property to which section 453(l) or
453A applies is outstanding at the close
of the year, the estate or trust must
include the interest due under section
453(l)(3)(B) or 453A(c), whichever is
applicable, in the amount to be entered
on line 7 of Schedule G, Form 1041,
with the notation “Section 453(l)
1041_Prep_Book_10.indb 163
interest” or “Section 453A(c) interest,”
whichever is applicable. Attach a
schedule showing the computation.
Form 4970, Tax on Accumulation
Distribution of Trusts. Include on this
line any tax due on an accumulation
distribution from a trust. To the left of
the entry space, write “From Form
4970” and the amount of the tax.
Form 8697, Interest Computation
Under the Look-Back Method for
Completed Long-Term Contracts.
Include the interest due under the
look-back method of section 460(b)(2).
To the left of the entry space, write
“From Form 8697” and the amount of
interest due.
Form 8866, Interest Computation
Under the Look-Back Method for
Property Depreciated Under the
Income Forecast Method. Include
the interest due under the look-back
method of section 167(g)(2). To the left
of the entry space, write “From Form
8866” and the amount of interest due.
Interest on deferral of gain from
certain constructive ownership
transactions. Include the interest due
under section 1260(b) on any deferral
of gain from certain constructive
ownership transactions. To the left of
the entry space, write “1260(b)” and the
amount of interest due.
Form 5329, Additional Taxes on
Qualified Plans (Including IRAs) and
Other Tax-Favored Accounts. If the
estate or trust fails to receive the
minimum distribution under section
4974, use Form 5329 to pay the excise
tax. To the left of the entry space, write
“From Form 5329” and the amount of
the tax.
Other Information
Question 1
If the estate or trust received
tax-exempt income, figure the allocation
of expenses between tax-exempt and
taxable income on a separate sheet
and attach it to the return. Enter only
the deductible amounts on the return.
Do not figure the allocation on the
return itself. For more information, see
the instructions for Allocation of
Deductions for Tax-Exempt Income on
page 19.
Report the amount of tax-exempt
interest income received or accrued in
the space provided below Question 1.
Also, include any exempt-interest
dividends the estate or trust received
as a shareholder in a mutual fund or
other regulated investment company.
Question 2
All salaries, wages, and other
compensation for personal services
-29-
INSTRUCTIONS FOR FORM 1041 163
must be included on the return of the
person who earned the income, even if
the income was irrevocably assigned to
a trust by a contract assignment or
similar arrangement.
The grantor or person creating the
trust is considered the owner if he or
she keeps “beneficial enjoyment” of or
substantial control over the trust
property. The trust’s income,
deductions, and credits are allocable to
the owner.
If you checked “Yes” for Question 2,
see Special Reporting Instructions on
page 11.
Question 3
Check the “Yes” box and enter the
name of the foreign country if either 1
or 2 below applies.
1. The estate or trust owns more
than 50% of the stock in any
corporation that owns one or more
foreign bank accounts.
2. At any time during the year the
estate or trust had an interest in or
signature or other authority over a
bank, securities, or other financial
account in a foreign country.
Exception. Check “No” if either of the
following applies to the estate or trust:
• The combined value of the accounts
was $10,000 or less during the whole
year, or
• The accounts were with a U.S.
military banking facility operated by a
U.S. financial institution.
Get Form TD F 90-22.1, Report of
Foreign Bank and Financial Accounts,
to see if the estate or trust is
considered to have an interest in or
signature or other authority over a
bank, securities, or other financial
account in a foreign country. You can
get Form TD F 90-22.1 from the IRS
website at www.irs.gov/pub/irs-pdf/
f90221.pdf.
If you checked “Yes” for Question 3,
file Form TD F 90-22.1 by June 30,
2009, with the Department of the
Treasury at the address shown on the
form. Form TD F 90-22.1 is not a tax
return, so do not file it with Form 1041.
If you are required to file Form
! TD F 90-22.1 but do not, you
CAUTION may have to pay a penalty of up
to $10,000 (more in some cases).
Question 4
The estate or trust may be required to
file Form 3520, Annual Return To
Report Transactions With Foreign
Trusts and Receipt of Certain Foreign
Gifts, if:
• It directly or indirectly transferred
property or money to a foreign trust.
For this purpose, any U.S. person who
10/19/2009 10:14:28 AM
 164 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E

created a foreign trust is considered a exceptions relating to multiple trusts.

transferor; Schedule J (Form 1041) The trustee reports to the IRS the total
• It is treated as the owner of any part amount of the accumulation distribution
of the assets of a foreign trust under — Accumulation before any reduction for income
the grantor trust rules; or accumulated before the beneficiary
Distribution for Certain
• It received a distribution from a reaches age 21. If the multiple trust
foreign trust. Complex Trusts rules do not apply, the beneficiary
claims the exclusion when filing Form
An owner of a foreign trust must General Instructions 4970, as you may not be aware that the
TIP ensure that the trust files an beneficiary may be a beneficiary of
Use Schedule J (Form 1041) to report other trusts with other trustees.
annual information return on an accumulation distribution for a
Form 3520-A, Annual Information domestic complex trust that was: For examples of accumulation
Return of Foreign Trust With a U.S. • Previously treated at any time as a distributions that include payments from
Owner. foreign trust (unless an exception is one trust to another trust, and amounts
provided in future regulations), or distributed for a dependent’s support,
Question 5 • Created before March 1, 1984, see Regulations section 1.665(b)-1A(b).
An estate or trust claiming an interest unless that trust would not be Part II—Ordinary Income
deduction for qualified residence aggregated with other trusts under the
rules of section 643(f) if that section Accumulation Distribution
interest (as defined in section
163(h)(3)) on seller-provided financing applied to the trust. Enter the applicable year at the top of
must include on an attachment to the An accumulation distribution is the each column for each throwback year.
2008 Form 1041 the name, address, excess of amounts properly paid, Line 6—DNI for Earlier Years
and TIN of the person to whom the credited, or required to be distributed Enter the applicable amounts as
interest was paid or accrued (that is, (other than income required to be follows:
the seller). distributed currently) over the DNI of
the trust reduced by income required to Throwback
If the estate or trust received or be distributed currently. To have an year(s) Amount from line
accrued such interest, it must provide accumulation distribution, the 1969 – 1977 . . . . . . Schedule C, Form 1041, line 5
identical information on the person distribution must exceed the accounting 1978 – 1979 . . . . . . Form 1041, line 61
liable for such interest (that is, the 1980 . . . . . . . . . . Form 1041, line 60
income of the trust. 1981 – 1982 . . . . . . Form 1041, line 58
buyer). This information does not need 1983 – 1996 . . . . . . Schedule B, Form 1041, line 9
to be reported if it duplicates Specific Instructions 1997 – 2007 . . . . . . Schedule B, Form 1041, line 7
information already reported on Form
1098. Part I—Accumulation For information about throwback
Distribution in 2008 years, see the instructions for line 13.
Question 6 For purposes of line 6, in figuring the
Line 1—Distribution Under DNI of the trust for a throwback year,
To make the section 663(b) election to subtract any estate tax deduction for
treat any amount paid or credited to a Section 661(a)(2)
IRD if the income is includible in
beneficiary within 65 days following the Enter the amount from Schedule B of figuring the DNI of the trust for that
close of the tax year as being paid or Form 1041, line 10, for 2008. This is year.
credited on the last day of that tax year, the amount properly paid, credited, or
check the box. This election can be required to be distributed other than the Line 7—Distributions Made
made by the fiduciary of a complex amount of income for the current tax During Earlier Years
trust or the executor of a decedent’s year required to be distributed currently. Enter the applicable amounts as
estate. For the election to be valid, you follows:
must file Form 1041 by the due date
Line 2—DNI
(including extensions). Once made, the Enter the amount from Schedule B of Throwback Amount from line
election is irrevocable. Form 1041, line 7, for 2008. This is the year(s)
amount of DNI for the current tax year 1969 – 1977 . . . . . . Schedule C, Form 1041, line 8
determined under section 643(a). 1978 . . . . . . . . . . Form 1041, line 64
Question 7 1979 . . . . . . . . . . Form 1041, line 65
To make the section 643(e)(3) election Line 3—Distribution Under 1980 . . . . . . . . . . Form 1041, line 64
1981 – 1982 . . . . . . Form 1041, line 62
to recognize gain on property Section 661(a)(1) 1983 – 1996 . . . . . . Schedule B, Form 1041, line 13
distributed in kind, check the box and Enter the amount from Schedule B of 1997 – 2007 . . . . . . Schedule B, Form 1041, line 11
see the Instructions for Schedule D Form 1041, line 9, for 2008. This is the
(Form 1041). amount of income for the current tax Line 11—Prior Accumulation
year required to be distributed currently. Distribution Thrown Back to
Question 9 Line 5—Accumulation Any Throwback Year
Generally, a beneficiary is a skip Distribution Enter the amount of prior accumulation
person if the beneficiary is in a distributions thrown back to the
generation that is two or more If line 11, Schedule B of Form 1041 is
throwback years. Do not enter
generations below the generation of the more than line 8, Schedule B of Form
distributions excluded under section
transferor to the trust. 1041, complete the rest of Schedule J
663(a)(1) for gifts, bequests, etc.
and file it with Form 1041, unless the
To determine if a beneficiary that is a trust has no previously accumulated Line 13—Throwback Years
trust is a skip person, and for income. Allocate the amount on line 5 that is an
exceptions to the general rules, see the Generally, amounts accumulated accumulation distribution to the earliest
definition of a skip person in the before a beneficiary reaches age 21 applicable year first, but do not allocate
instructions for Schedule R of Form may be excluded by the beneficiary. more than the amount on line 12 for
706. See sections 665 and 667(c) for any throwback year. An accumulation
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 INSTRUCTIONS FOR FORM 1041 165

distribution is thrown back first to the Note. The alternative tax on capital
Throwback Amount from line
earliest preceding tax year in which gains was repealed for tax years year(s)
there is undistributed net income (UNI). beginning after December 31, 1978.
2002 . . . . . . . . . . Schedule D, the smaller
Then, it is thrown back beginning with The maximum rate on net capital gain of any gain on line 15a or
the next earliest year to any remaining for 1981, 1987, and 1991 through 2007 line 16, column (2)
preceding tax years of the trust. The is not an alternative tax for this 2003 . . . . . . . . . . Schedule D, the smaller
portion of the accumulation distribution purpose. of any gain on line 15a or
allocated to the earliest preceding tax line 16a, column (2)
year is the amount of the UNI for that Line 18—Regular Tax 2004 – 2007 . . . . . . Schedule D, the smaller
year. The portion of the accumulation Enter the applicable amounts as of any gain on line 14a
or line 15, column (2)
distribution allocated to any remaining follows:
preceding tax year is the amount by
which the accumulation distribution is Throwback Amount from line Line 22—Taxable Income
year(s)
larger than the total of the UNI for all Enter the applicable amounts as
1969 – 1976 . . . . Form 1041, page 1, line 24 follows:
earlier preceding tax years. 1977 . . . . . . . . Form 1041, page 1, line 26
1978 – 1979 . . . . Form 1041, line 27 Throwback Amount from line
A tax year of a trust during which the 1980 – 1984 . . . . Form 1041, line 26c year(s)
trust was a simple trust for the entire 1985 – 1986 . . . . Form 1041, line 25c 1969 – 1976 . . . . . . . . Form 1041, page 1, line 23
year is not a preceding tax year unless 1987 . . . . . . . . Form 1041, line 22c 1977 . . . . . . . . . . . . Form 1041, page 1, line 25
(a) during that year the trust received 1988 – 2007 . . . . Schedule G, Form 1041, line 1a 1978 – 1979 . . . . . . . . Form 1041, line 26
outside income, or (b) the trustee did 1980 – 1984 . . . . . . . . Form 1041, line 25
not distribute all of the trust’s income Line 19—Trust’s Share of Net 1985 – 1986
1987 . . . .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Form 1041, line 24
Form 1041, line 21
that was required to be distributed Short-Term Gain 1988 – 1996 . . . . . . . . Form 1041, line 22
currently for that year. In this case, UNI For each throwback year, enter the 1997 . . . . . . . . . . . . Form 1041, line 23
for that year must not be more than the smaller of the capital gain from the two 1998 – 2007 . . . . . . . . Form 1041, line 22
greater of the outside income or income lines indicated. If there is a capital loss
not distributed during that year. or a zero on either or both of the two Line 26—Tax on Income Other
The term “outside income” means lines indicated, enter zero on line 19. Than Long-Term Capital Gain
amounts that are included in the DNI of Enter the applicable amounts as
Throwback Amount from line
the trust for that year but that are not year(s) follows:
“income” of the trust as defined in 1969 – 1970 . . Schedule D, line 10, column 2, or Throwback Amount from line
Regulations section 1.643(b)-1. Some Schedule D, line 12, column 2 year(s)
examples of outside income are: (a) 1971 – 1978 . . Schedule D, line 14, column 2, or
1969 . . . . . . . . . . . Schedule D, line 20
income taxable to the trust under Schedule D, line 16, column 2
1979 . . . . . . Schedule D, line 18, column (b), or 1970 . . . . . . . . . . . Schedule D, line 19
section 691; (b) unrealized accounts Schedule D, line 20, column (b) 1971 . . . . . . . . . . . Schedule D, line 50
receivable that were assigned to the 1980 – 1981 . . Schedule D, line 14, column (b), or 1972 – 1975 . . . . . . . Schedule D, line 48
trust; and (c) distributions from another Schedule D, line 16, column (b) 1976 – 1978 . . . . . . . Schedule D, line 27
trust that include the DNI or UNI of the 1982 . . . . . . Schedule D, line 16, column (b), or
other trust. Schedule D, line 18, column (b) Line 27—Trust’s Share of Net
1983 – 1996 . . Schedule D, line 15, column (b), or
Schedule D, line 17, column (b) Short-Term Gain
Line 16—Tax-Exempt Interest If there is a loss on any of the following
1997 – 2002 . . Schedule D, line 14, column (2), or
Included on Line 13 Schedule D, line 16, column (2) lines, enter zero on line 27 for the
For each throwback year, divide line 15 2003 . . . . . . Schedule D, line 14a, column (2), or applicable throwback year. Otherwise,
Schedule D, line 16a, column (2) enter the applicable amounts as
by line 6 and multiply the result by the 2004 – 2007 . . Schedule D, line 13, column (2), or
following: Schedule D, line 15, column (2) follows:
Throwback Amount from line Throwback Amount from line
year(s) Line 20—Trust’s Share of Net year(s)
1969 – 1977 . . . . Schedule C, Form 1041, line 2(a) Long-Term Gain 1969 – 1970 . . . . Schedule D, line 10, column 2
1978 – 1979 . . . . Form 1041, line 58(a) 1971 – 1978 . . . . Schedule D, line 14, column 2
Enter the applicable amounts as
1980 . . . . . . . . Form 1041, line 57(a)
1981 – 1982 . . . . Form 1041, line 55(a) follows:
1983 – 2007 . . . . Schedule B, Form 1041, line 2
Line 28—Trust’s Share of
Throwback
year(s)
Amount from line Taxable Income Less Section
1202 Deduction
Part III—Taxes Imposed on 1969 – 1970 . . . . . . 50% of Schedule D, line 13(e)
Enter the applicable amounts as
Undistributed Net Income 1971 – 1977 . . . . . . 50% of Schedule D, line 17(e)
follows:
For the regular tax computation, if there 1978 . . . . . . . . . . Schedule D, line 17(e), or line
31, whichever is applicable, Throwback year(s) Amount from line
is a capital gain, complete lines 18 less Form 1041, line 23
through 25 for each throwback year. If 1979 . . . . . . . . . . Schedule D, line 25 or line 27,
1969 . . . . . . . . . . . . Schedule D, line 19
the trustee elected the alternative tax 1970 . . . . . . . . . . . . Schedule D, line 18
whichever is applicable, less
1971 . . . . . . . . . . . . Schedule D, line 38
on capital gains, complete lines 26 Form 1041, line 23
1972 – 1975 . . . . . . . . Schedule D, line 39
through 31 instead of lines 18 through 1980 – 1981 . . . . . . Schedule D, line 21, less
1976 – 1978 . . . . . . . . Schedule D, line 21
Schedule D, line 22
25 for each applicable year. If there is 1982 . . . . . . . . . . Schedule D, line 23, less
no capital gain for any year, or there is Schedule D, line 24 Part IV—Allocation to
a capital loss for every year, enter on 1983 – 1986 . . . . . . Schedule D, line 22, less
line 9 the amount of the tax for each Schedule D, line 23 Beneficiary
1987 – 1996 . . . . . . Schedule D, the smaller
year identified in the instruction for line of any gain on line 16
Complete Part IV for each beneficiary.
18 and do not complete Part III. If the or line 17, column (b) If the accumulation distribution is
trust received an accumulation 1997 – 2001 . . . . . . Schedule D, the smaller
allocated to more than one beneficiary,
distribution from another trust, see of any gain on line 15c or attach an additional copy of Schedule J
Regulations section 1.665(b)-1A. line 16, column (2) with Part IV completed for each
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 166 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
additional beneficiary. Give each
beneficiary a copy of his or her
respective Part IV information. If more
than 5 throwback years are involved,
use another Schedule J, completing
Parts II and III for each additional
throwback year.
If the beneficiary is a nonresident
alien individual or a foreign corporation,
see section 667(e) about retaining the
character of the amounts distributed to
determine the amount of the U.S.
withholding tax.
The beneficiary uses Form 4970 to
figure the tax on the distribution. The
beneficiary also uses Form 4970 for the
section 667(b)(6) tax adjustment if an
accumulation distribution is subject to
estate or generation-skipping transfer
tax. This is because the trustee may
not be the estate or generation-skipping
transfer tax return filer.
Schedule K-1 (Form
1041)— Beneficiary’s
Share of Income,
Deductions, Credits, etc.
What’s New
On page 2 of Schedule K-1 (Form
1041), we added two new credits that
may be passed through, the agricultural
chemicals security credit (code R) and
the credit for employer differential wage
payments (code T). Also, we removed
the expired Hurricane Katrina housing
credit (formerly code R).
General Instructions
Use Schedule K-1 (Form 1041) to
report the beneficiary’s share of
income, deductions, and credits from a
trust or a decedent’s estate.
Grantor type trusts do not use
! Schedule K-1 (Form 1041) to
CAUTION report the income, deductions,
or credits of the grantor (or other
person treated as owner). See Grantor
Type Trusts on page 11.
Who Must File
The fiduciary (or one of the joint
fiduciaries) must file Schedule K-1. A
copy of each beneficiary’s Schedule
K-1 is attached to the Form 1041 filed
with the IRS, and each beneficiary is
given a copy of his or her respective
Schedule K-1. One copy of each
Schedule K-1 must be retained for the
fiduciary’s records.
Beneficiary’s Identifying
Number
As a payer of income, you are required
to request and provide a proper
identifying number for each recipient of
income. Enter the beneficiary’s number
1041_Prep_Book_10.indb 166
on the respective Schedule K-1 when
you file Form 1041. Individuals and
business recipients are responsible for
giving you their TINs upon request. You
may use Form W-9 to request the
beneficiary’s identifying number.
Penalty. You may be charged a $50
penalty for each failure to provide a
required TIN, unless reasonable cause
is established for not providing it.
Explain any reasonable cause in a
signed affidavit and attach it to this
return.
Substitute Forms
You do not need IRS approval to use a
substitute Schedule K-1 if it is an exact
copy of the IRS schedule. The boxes
must use the same numbers and titles
and must be in the same order and
format as on the comparable IRS
Schedule K-1. The substitute schedule
must include the OMB number and the
6-digit form ID code in the upper
right-hand corner of the schedule.
You must provide each beneficiary
with the Instructions for Beneficiary
Filing Form 1040 or other prepared
specific instructions for each item
reported on the beneficiary’s Schedule
K-1.
Inclusion of Amounts in
Beneficiaries’ Income
Simple trust. The beneficiary of a
simple trust must include in his or her
gross income the amount of the income
required to be distributed currently,
whether or not distributed, or if the
income required to be distributed
currently to all beneficiaries exceeds
the DNI, his or her proportionate share
of the DNI. The determination of
whether trust income is required to be
distributed currently depends on the
terms of the trust instrument and
applicable local law. See Regulations
section 1.652(c)-4 for a comprehensive
example.
Estates and complex trusts. The
beneficiary of a decedent’s estate or
complex trust must include in his or her
gross income the sum of:
1. The amount of the income
required to be distributed currently, or if
the income required to be distributed
currently to all beneficiaries exceeds
the DNI (figured without taking into
account the charitable deduction), his
or her proportionate share of the DNI
(as so figured), and
2. All other amounts properly paid,
credited, or required to be distributed,
or if the sum of the income required to
be distributed currently and other
amounts properly paid, credited, or
required to be distributed to all
beneficiaries exceeds the DNI, his or
her proportionate share of the excess
-32-
of DNI over the income required to be
distributed currently.
See Regulations section 1.662(c)-4
for a comprehensive example.
For complex trusts that have more
than one beneficiary, and if different
beneficiaries have substantially
separate and independent shares, their
shares are treated as separate trusts
for the sole purpose of determining the
amount of DNI allocable to the
respective beneficiaries. A similar rule
applies to treat substantially separate
and independent shares of different
beneficiaries of an estate as separate
estates. For examples of the application
of the separate share rule, see the
regulations under section 663(c).
Gifts and bequests. Do not include in
the beneficiary’s income any gifts or
bequests of a specific sum of money or
of specific property under the terms of
the governing instrument that are paid
or credited in three installments or less.
Amounts that can be paid or credited
only from income of the estate or trust
do not qualify as a gift or bequest of a
specific sum of money.
Past years. Do not include in the
beneficiary’s income any amounts
deducted on Form 1041 for an earlier
year that were credited or required to
be distributed in that earlier year.
Character of income. The
beneficiary’s income is considered to
have the same proportion of each class
of items entering into the computation
of DNI that the total of each class has
to the DNI (for example, half dividends
and half interest if the income of the
estate or trust is half dividends and half
interest).
Allocation of deductions.
Generally, items of deduction that enter
into the computation of DNI are
allocated among the items of income to
the extent such allocation is not
inconsistent with the rules set out in
section 469 and its regulations, relating
to passive activity loss limitations, in the
following order.
First, all deductions directly
attributable to a specific class of income
are deducted from that income. For
example, rental expenses, to the extent
allowable, are deducted from rental
income.
Second, deductions that are not
directly attributable to a specific class of
income generally may be allocated to
any class of income, as long as a
reasonable portion is allocated to any
tax-exempt income. Deductions
considered not directly attributable to a
specific class of income under this rule
include fiduciary fees, safe deposit box
rental charges, and state income and
personal property taxes. The charitable
10/19/2009 10:14:30 AM

deduction, however, must be ratably
apportioned among each class of
income included in DNI.
Finally, any excess deductions that
are directly attributable to a class of
income may be allocated to another
class of income. However, in no case
can excess deductions from a passive
activity be allocated to income from a
nonpassive activity, or to portfolio
income earned by the estate or trust.
Excess deductions attributable to
tax-exempt income cannot offset any
other class of income.
In no case can deductions be
allocated to an item of income that is
not included in the computation of DNI,
or attributable to corpus.
You cannot show any negative
amounts for any class of income shown
in boxes 1 through 8 of Schedule K-1.
However, for the final year of the estate
or trust, certain deductions or losses
can be passed through to the
beneficiary(ies). See the instructions for
box 11 for more information on these
deductions and losses. Also, the
beneficiary’s share of depreciation and
depletion is apportioned separately.
These deductions may be allocated to
the beneficiary(ies) in amounts greater
than his or her income. See
Depreciation, Depletion, and
Amortization on page 18 and Rev. Rul.
74-530, 1974-2 C.B. 188.
Beneficiary’s Tax Year
The beneficiary’s income from the
estate or trust must be included in the
beneficiary’s tax year during which the
tax year of the estate or trust ends. See
Pub. 559 for more information,
including the effect of the death of a
beneficiary during the tax year of the
estate or trust.
General Reporting
Information
If the return is for a fiscal year or a
short tax year, fill in the tax year space
at the top of each Schedule K-1. On
each Schedule K-1, enter the
information about the estate or trust
and the beneficiary in Parts I and II
(items A through I). In Part III, enter the
beneficiary’s share of each item of
income, deduction, credit, and any
other information the beneficiary needs
to file his or her income tax return.
Codes. In box 9 and boxes 11 through
14, identify each item by entering a
code in the column to the left of the
entry space for the dollar amount.
These codes are identified in these
instructions and on the back of the
Schedule K-1.
Attached statements. Enter an
asterisk (*) after the code, if any, in the
column to the left of the dollar amount
entry space for each item for which you
1041_Prep_Book_10.indb 167
have attached a statement providing
additional information. For those
informational items that cannot be
reported as a single dollar amount,
enter the code and asterisk in the
left-hand column and enter “STMT” in
the entry space to the right to indicate
that the information is provided on an
attached statement. More than one
attached statement can be placed on
the same sheet of paper and should be
identified in alphanumeric order by box
number followed by the letter code (if
any). For example: “Box 9, Code
A — Depreciation” (followed by the
information the beneficiary needs).
Too few entry spaces on Schedule
K-1? If the estate or trust has more
coded items than the number of spaces
in box 9 or boxes 11 through 14, do not
enter a code or dollar amount in the last
entry space of the box. In the last entry
space, enter an asterisk in the left
column and enter “STMT” in the entry
space to the right. Report the additional
items on an attached statement and
provide the box number, code,
description, and dollar amount or
information for each additional item. For
example: “Box 13, Code H — Alcohol
and Cellulosic Biofuels Fuel
Credit — $500.00.”
Specific Instructions
Part I. Information About the
Estate or Trust
On each Schedule K-1, enter the name,
address, and identifying number of the
estate or trust. Also, enter the name
and address of the fiduciary.
Item D
If the fiduciary of a trust or decedent’s
estate filed Form 1041-T, you must
check this box and enter the date it was
filed.
Item E
If this is the final year of the estate or
trust, you must check this box.
Note. If this is the final K-1 for the
beneficiary, check the “Final K-1” box at
the top of Schedule K-1.
Part II. Information About the
Beneficiary
Complete a Schedule K-1 for each
beneficiary. On each Schedule K-1,
enter the beneficiary’s name, address,
and identifying number.
Item H
Check the foreign beneficiary box if the
beneficiary is a nonresident alien
individual, a foreign corporation, or a
foreign estate or trust. Otherwise, check
the domestic beneficiary box.
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INSTRUCTIONS FOR FORM 1041 167
Part III. Beneficiary’s Share
of Current Year Income,
Deductions, Credits, and
Other Items
Box 1—Interest
Enter the beneficiary’s share of the
taxable interest income minus allocable
deductions.
Box 2a—Total Ordinary
Dividends
Enter the beneficiary’s share of ordinary
dividends minus allocable deductions.
Box 3—Net Short-Term Capital
Gain
Enter the beneficiary’s share of the net
short-term capital gain from line 13,
column (1), Schedule D (Form 1041),
minus allocable deductions. Do not
enter a loss on line 3. If, for the final
year of the estate or trust, there is a
capital loss carryover, enter in box 11,
using code B, the beneficiary’s share of
short-term capital loss carryover.
However, if the beneficiary is a
corporation, enter in box 11, using code
B, the beneficiary’s share of all short-
and long-term capital loss carryovers as
a single item. See section 642(h) and
related regulations for more
information.
Boxes 4a through 4c—Net
Long-Term Capital Gain
Enter the beneficiary’s share of the net
long-term capital gain from lines 14a
through 14c, column (1), Schedule D
(Form 1041) minus allocable
deductions.
Do not enter a loss in boxes 4a
through 4c. If, for the final year of the
estate or trust, there is a capital loss
carryover, enter in box 11, using code
C, the beneficiary’s share of the
long-term capital loss carryover. (If the
beneficiary is a corporation, see the
instructions for box 3.) See section
642(h) and related regulations for more
information.
Gains or losses from the complete or
partial disposition of a rental, rental real
estate, or trade or business activity that
is a passive activity must be shown on
an attachment to Schedule K-1.
Box 5—Other Portfolio and
Nonbusiness Income
Enter the beneficiary’s share of
annuities, royalties, or any other
income, minus allocable deductions
(other than directly apportionable
deductions), that is not subject to any
passive activity loss limitation rules at
the beneficiary level. Use boxes 6
through 8 to report income items
subject to the passive activity rules at
the beneficiary’s level.
10/19/2009 10:14:30 AM
 168 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
Boxes 6 through 8—Ordinary
Business Income, Rental Real
Estate, and Other Rental
Income
Enter the beneficiary’s share of trade or
business, rental real estate, and other
rental income, minus allocable
deductions (other than directly
apportionable deductions). To assist
the beneficiary in figuring any
applicable passive activity loss
limitations, also attach a separate
schedule showing the beneficiary’s
share of income derived from each
trade or business, rental real estate,
and other rental activity.
Box 9—Directly Apportioned
Deductions
The limitations on passive
! activity losses and credits under
CAUTION section 469 apply to estates and
trusts. Estates and trusts that distribute
income to beneficiaries are allowed to
apportion depreciation, depletion, and
amortization deductions to the
beneficiaries. These deductions are
referred to as “directly apportionable
deductions.”
Rules for treating a beneficiary’s
income and directly apportionable
deductions from an estate or trust and
other rules for applying the passive loss
and credit limitations to beneficiaries of
estates and trusts have not yet been
issued.
Any directly apportionable deduction,
such as depreciation, is treated by the
beneficiary as having been incurred in
the same activity as incurred by the
estate or trust. However, the character
of such deduction may be determined
as if the beneficiary incurred the
deduction directly.
To assist the beneficiary in figuring
any applicable passive activity loss
limitations, also attach a separate
schedule showing the beneficiary’s
share of directly apportionable
deductions derived from each trade or
business, rental real estate, and other
rental activity.
Enter the beneficiary’s share of
directly apportioned deductions using
codes A through C.
Depreciation (code A). Enter the
beneficiary’s share of the depreciation
deductions directly apportioned to each
activity reported in boxes 5 through 8.
See the instructions on page 18 for a
discussion of how the depreciation
deduction is apportioned between the
beneficiaries and the estate or trust.
Report any AMT adjustment or tax
preference item attributable to
depreciation separately in box 12, using
code G.
1041_Prep_Book_10.indb 168
Note. An estate or trust cannot make
an election under section 179 to
expense certain tangible property.
Depletion (code B). Enter the
beneficiary’s share of the depletion
deduction under section 611 directly
apportioned to each activity reported in
boxes 5 through 8. See the instructions
on page 18 for a discussion of how the
depletion deduction is apportioned
between the beneficiaries and the
estate or trust. Report any tax
preference item attributable to depletion
separately in box 12, using code H.
Amortization (code C). Itemize the
beneficiary’s share of the amortization
deductions directly apportioned to each
activity reported in boxes 5 through 8.
Apportion the amortization deductions
between the estate or trust and the
beneficiaries in the same way that the
depreciation and depletion deductions
are divided. Report any AMT
adjustment attributable to amortization
separately in box 12, using code I.
Box 10—Estate Tax Deduction
(Including Certain
Generation-Skipping Transfer
Taxes)
If the distribution deduction consists of
any IRD, and the estate or trust was
allowed a deduction under section
691(c) for the estate tax paid
attributable to such income (see the
line 19 instructions on page 22), then
the beneficiary is allowed an estate tax
deduction in proportion to his or her
share of the distribution that consists of
such income. For an example of the
computation, see Regulations section
1.691(c)-2. Figure the computation on a
separate sheet and attach it to the
return.
Box 11, Code A—Excess
Deductions on Termination
If this is the final return of the estate or
trust, and there are excess deductions
on termination (see the instructions for
line 22 on page 23), enter the
beneficiary’s share of the excess
deductions in box 11, using code A.
Figure the deductions on a separate
sheet and attach it to the return.
Excess deductions on termination
occur only during the last tax year of
the trust or decedent’s estate when the
total deductions (excluding the
charitable deduction and exemption)
are greater than the gross income
during that tax year.
Generally, a deduction based on an
NOL carryover is not available to a
beneficiary as an excess deduction.
However, if the last tax year of the
estate or trust is also the last year in
which an NOL carryover may be taken
(see section 172(b)), the NOL carryover
is considered an excess deduction on
-34-
the termination of the estate or trust to
the extent it is not absorbed by the
estate or trust during its final tax year.
For more information, see Regulations
section 1.642(h)-4 for a discussion of
the allocation of the carryover among
the beneficiaries.
Only the beneficiary of an estate or
trust that succeeds to its property is
allowed to deduct that entity’s excess
deductions on termination. A
beneficiary who does not have enough
income in that year to absorb the entire
deduction may not carry the balance
over to any succeeding year. An
individual beneficiary must be able to
itemize deductions in order to claim the
excess deductions in determining
taxable income.
Box 11, Codes B and
C—Unused Capital Loss
Carryover
Upon termination of the trust or
decedent’s estate, the beneficiary
succeeding to the property is allowed
as a deduction any unused capital loss
carryover under section 1212. If the
estate or trust incurs capital losses in
the final year, use the Capital Loss
Carryover Worksheet in the Instructions
for Schedule D (Form 1041) to figure
the amount of capital loss carryover to
be allocated to the beneficiary.
Box 11, Codes D and E—NOL
Carryover
Upon termination of a trust or
decedent’s estate, a beneficiary
succeeding to its property is allowed to
deduct any unused NOL (and any
ATNOL) carryover for regular and AMT
purposes if the carryover would be
allowable to the estate or trust in a later
tax year but for the termination. Enter in
box 11, using codes D and E, the
unused carryover amounts.
Box 12—AMT Items
Adjustment for minimum tax
purposes (code A). Enter the
beneficiary’s share of the adjustment
for minimum tax purposes.
To figure the adjustment, subtract
the beneficiary’s share of the income
distribution deduction figured on
Schedule B, line 15, from the
beneficiary’s share of the income
distribution deduction on a minimum tax
basis figured on Schedule I (Form
1041), line 44. The difference is the
beneficiary’s share of the adjustment
for minimum tax purposes.
Note. Schedule B, line 15 equals the
sum of all Schedule K-1s, box 1, 2a, 3,
4a, 5, 6, 7, and 8.
AMT adjustment attributable to
qualified dividends, net short-term
capital gains, or net long-term
10/19/2009 10:14:31 AM

capital gains (codes B through D). If
any part of the amount reported in box
12, code A, is attributable to qualified
dividends (code B), net short-term
capital gain (code C), or net long-term
capital gain (code D), enter that part
using the applicable code.
AMT adjustment attributable to
unrecaptured section 1250 gain or
28% rate gain (codes E and F). Enter
the beneficiary’s distributive share of
any AMT adjustments to the
unrecaptured section 1250 gain (code
E) or 28% rate gain (code F),
whichever is applicable, in box 12.
Accelerated depreciation, depletion,
and amortization (codes G through
I). Enter any adjustments or tax
preference items attributable to
depreciation, depletion, or amortization
that were directly apportioned to the
beneficiary. For property placed in
service before 1987, report separately
the accelerated depreciation of real and
leased personal property.
Exclusion items (code J). Enter the
beneficiary’s share of the adjustment
for minimum tax purposes from
Schedule K-1, box 12, code A, that is
attributable to exclusion items
(Schedule I (Form 1041), lines 2
through 6 and 8).
Box 13—Credits and Credit
Recapture
Enter each beneficiary’s share of the
credits and credit recapture using the
applicable codes. Listed below are the
credits that can be allocated to the
beneficiary(ies). Attach a statement if
additional information must be provided
to the beneficiary as explained below.
• Credit for estimated taxes (code
A) — Payment of estimated tax to be
credited to the beneficiary (section
643(g)).
See the instructions for line 24b
! on page 24 before you make an
CAUTION entry to allocate any estimated
tax payments to a beneficiary. If the
fiduciary does not make a valid
election, then the IRS will disallow the
estimated tax payment that is reported
on Schedule K-1 and claimed on the
beneficiary’s return.
• Credit for backup withholding (code
B).
• The low-income housing credit (code
C). Attach a statement that shows the
beneficiary’s share of the amount, if
any, entered on line 6 of Form 8586
with instructions to report that amount
on line 4 of Form 8586 or line 1d of
Form 3800 if the beneficiary’s only
source for the credit is a pass-through
entity. Also, show the beneficiary’s
share of the amount, if any, entered on
line 19 of Form 8586 with instructions
1041_Prep_Book_10.indb 169
to report that amount on line 11 of Form
8586.
• Qualified rehabilitation expenditures
(code D). Attach a statement that
shows the dates, basis, and
expenditures and their corresponding
line on Form 3468 for reporting each
item of information.
• Basis of other investment credit
property (code E). Attach a statement
that shows the basis of and
corresponding lines for reporting
property qualifying for the energy credit,
qualifying advanced coal project credit,
and qualifying gasification project
credit. If the statement shows an
amount for line 5c, 5f, 5i, 5l, 11c, 11f, or
11i, then the information for the
subsequent line on Form 3468 must be
provided.
• Work opportunity credit (code F).
• Welfare-to-work credit (code G).
• Alcohol and cellulosic biofuel fuels
credit (code H). If the credit includes
the small ethanol producer credit,
attach a statement that shows the
beneficiary’s share of the small ethanol
producer credit, the number of gallons
claimed for the small ethanol producer
credit, and the estate’s or trust’s
productive capacity for alcohol.
• Credit for increasing research
activities (code I).
• Renewable electricity, refined coal,
and Indian coal production credit (code
J). Attach a statement that shows the
amount of the credit the beneficiary
must report on line 9 and line 29 of
Form 8835, in case the beneficiary is
required to file that form in addition to
Form 3800.
• Empowerment zone and renewal
community employment credit (code K).
• Indian employment credit (code L).
• Orphan drug credit (code M).
• Credit for employer provided child
care and facilities (code N).
• Biodiesel and renewable diesel fuels
credit (code O). If the credit includes
the small agri-biodiesel credit, attach a
statement that shows the beneficiary’s
share of the small agri-biodiesel credit,
the number of gallons claimed for the
small agri-biodiesel credit, and the
estate’s or trust’s productive capacity
for agri-biodiesel.
• Nonconventional source fuel credit
(code P).
• Credit to holders of tax credit bonds
(code Q).
• Agricultural chemicals security credit
(code R).
• Energy efficient appliance credit
(code S).
• Credit for employer differential wage
payments (code T).
• Recapture of credits (code U). On an
attached statement to Schedule K-1,
-35-
INSTRUCTIONS FOR FORM 1041 169
provide any information the beneficiary
will need to report recapture of credits.
Box 14—Other Information
Enter the dollar amounts and applicable
codes for the items listed under Other
Information.
Domestic production activities
information. The estate or trust
allocates QPAI (whether positive or
negative) and Form W-2 wages based
on the relative proportion of the trust’s
or estate’s DNI that is distributed or
required to be distributed to the
beneficiary. If the estate or trust has no
DNI for the tax year, QPAI and Form
W-2 wages are allocated entirely to the
estate or trust.
Qualified production activities
income (code C). Enter the
beneficiary’s share, if any, of the
estate’s or trust’s QPAI. The QPAI will
be less than zero if the cost of goods
sold and deductions allocated and
apportioned to domestic production
gross receipts (DPGR) is more than the
estate’s or trust’s DPGR. See Form
8903, Domestic Production Activities
Deduction, and its instructions for more
details.
Form W-2 wages (code D). Use
code D to report the beneficiary’s
share, if any, of Form W-2 wages. Do
not enter more than 6% of the
beneficiary’s share, if any, of the
estate’s or trust’s QPAI. See Form 8903
and its instructions for more details.
Foreign trading gross receipts
(code G). Enter the beneficiary’s
share, if any, of foreign trading gross
receipts. See Form 8873,
Extraterritorial Income Exclusion, for
more information.
Other information (code H). List on a
separate sheet the tax information the
beneficiary will need to complete his or
her return that is not entered elsewhere
on Schedule K-1.
For example, if the estate or trust
participates in a transaction that must
be disclosed on Form 8886 (see page
10), both the estate or trust and its
beneficiaries may be required to file
Form 8886. The estate or trust must
determine if any of its beneficiaries are
required to disclose the transaction and
provide those beneficiaries with
information they will need to file Form
8886. This determination is based on
the category(ies) under which a
transaction qualified for disclosure. See
the instructions for Form 8886 for
details.
Income tax withheld on wages
!
CAUTION
cannot be distributed to the
beneficiary.
10/19/2009 10:14:31 AM
 170 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E

Privacy Act and 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 Code section 6103.
The time needed to complete and file this form and related schedules will vary depending on individual circumstances. The
estimated average times are:
Form 1041 Schedule D Schedule I Schedule J Schedule K-1
Recordkeeping 37 hr., 32 min. 33 hr., 14 min. 17 hr., 27 min. 39 hr., 27 min. 7 hr., 39 min.
Learning about the law
or the form 19 hr., 17 min. 2 hr., 46 min. 4 hr., 28 min. 1 hr., 17 min. 47 min.
Preparing the form 39 hr., 22 min. 4 hr., 20 min. 4 hr., 57 min. 1 hr., 59 min. 57 min.
Copying, assembling, and sending the
form to the IRS 5 hr., 22 min. 16 min. ---- ---- ----

If you have comments concerning the accuracy of these time estimates or suggestions for making this form and related
schedules 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-6526, Washington, DC 20224. Do not send
the tax form to this address. Instead, see Where To File earlier.

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1041_Prep_Book_10.indb 170 10/19/2009 10:14:32 AM


Index
A E
Accounting income . . . . . . . . . . . . 2
AGI . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Alaska Native Settlement
Trusts . . . . . . . . . . . . . . . . . . . . . . 6
Allowable miscellaneous itemized
deductions (AMID) . . . . . 21, 22
Amended return . . . . . . . . . . . . . . 16
Amounts paid or permanently set
aside . . . . . . . . . . . . . . . . . . . . . . 25
Assembly . . . . . . . . . . . . . . . . . . . . 11
Attachments . . . . . . . . . . . . . . . . . 11
B ESBTs (See Electing small
Bankruptcy estate . . . . . . 6, 13, 15
Bankruptcy information . . . . . . . 13
Beneficiary . . . . . . . . . . . . . . . . . . . . 3
Allocation of estimated tax
payment . . . . . . . . . . . . . . . 9, 24
Complex trust . . . . . . . . . . . . . . 32
Estate . . . . . . . . . . . . . . . . . . . . . 32
Simple trust . . . . . . . . . . . . . . . . 32
Tax year for inclusion . . . . . . . 33
Withholding on foreign
person . . . . . . . . . . . . . . . . . . . 25
Blind trust . . . . . . . . . . . . . . . . . . . . 17
C timely . . . . . . . . . . . . . . . . . . . . 9
Cemetery perpetual care
fund . . . . . . . . . . . . . . . . . . . . . . . 22
Charitable deduction . . . . . . . . . . 24
Charitable remainder
trusts . . . . . . . . . . . . . . . . . . . . . . 16
Common trust fund . . . . . . . . . . . . 6
D First tier distributions . . . . . . . . . . 26
Decedent’s Estate . . . . . . . . . . . . . 3
Definitions:
Accumulation
distribution . . . . . . . . . . . . . . . 30
Beneficiary . . . . . . . . . . . . . . . . . . 3
Complex trust . . . . . . . . . . . . . . 15
Decedent’s Estate . . . . . . . . 3, 15
DNI . . . . . . . . . . . . . . . . . . . . . . . . . 3
Fiduciary . . . . . . . . . . . . . . . . . . . . 3
Grantor trusts . . . . . . . . . . . . . . 15
IRD . . . . . . . . . . . . . . . . . . . . . . . . . 3
Outside income . . . . . . . . . . . . 31
Pooled income fund . . . . . . . . 15
Revocable Living Trust . . . . . . 4
Simple trust . . . . . . . . . . . . . . . . 15
Trust . . . . . . . . . . . . . . . . . . . . . . . 4
Trusts . . . . . . . . . . . . . . . . . . . . . . 4
Distributable net income (See
DNI)
DNI . . . . . . . . . . . . . . . . . . . . . . . . 3, 25
1041_Prep_Book_10.indb 171
Electing small business
trusts . . . . . . . . . . . . . . . . . . 12, 29
ESBT (S portion only) . . . . . . 15
S portion . . . . . . . . . . . . . . . . . . . 12
Elections:
Section 643(e)(3) . . . . . . . . . . . 26
Section 643(g) . . . . . . . . . . . 9, 24
Section 645 . . . . . . . . . . . . . . . . . 4
Special rule for qualified
revocable trusts . . . . . . . . . . . 4
Treating contributions as paid in
prior tax year . . . . . . . . . . . . . 25
Electronic deposits . . . . . . . . . . . . 8
business trusts)
Estate . . . . . . . . . . . . . . . . . . . . . 4, 32
Bankruptcy . . . . . . . . . . . . . . 6, 15
Exemption for . . . . . . . . . . . . . . 23
Foreign . . . . . . . . . . . . . . . . . . . . . 4
Who must file . . . . . . . . . . . . . . . 4
Estate tax deduction . . . . . . . . . . 22
Estimated tax . . . . . . . . . . . . . . 8, 24
Allocation of payments to
beneficiaries . . . . . . . . . . . 8, 24
Penalty . . . . . . . . . . . . . . . . . . . . 24
Excess deductions . . . . . . . . . . . 24
Exemption . . . . . . . . . . . . . . . . . . . 23
Extraterritorial income
exclusion . . . . . . . . . . . . . . . . . . 17
F Grantor . . . . . . . . . . . . . . . . . . . . . 2
Fiduciary . . . . . . . . . . . . . . . . . 3, 4, 7
Fiduciary accounting income (FAI)
(See Accounting income)
Final return . . . . . . . . . . . . . . . . . . . 16
Foreign tax credit . . . . . . . . . . . . . 27
Form 1041-T . . . . . . . . . . . . . . . 9, 24
Form 8855 . . . . . . . . . . . . . . . . . . . . 4
G Qualified settlement funds . . . . . . 6
General business credit . . . . . . . 28
Grantor trusts . . . . . . . . . . 2, 11, 15
Backup withholding . . . . . . . . . 12
Nonqualified deferred
compensation plans . . . . . . 15
Optional filing methods . . . . . 11
Pre-need funeral trusts . . . . . 15
Special filing instructions . . . . 11
GST tax deduction . . . . . . . . . . . . 23
I Nonexempt charitable
Income distribution
deduction . . . . . . . . . . . . 2, 22, 25
-37-
INSTRUCTIONS FOR FORM 1041
Income in respect of a decedent
(See IRD)
Inter vivos . . . . . . . . . . . . . . . . . . . 2, 4
Interest income . . . . . . . . . . . . . . . 17
IRD . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Deduction . . . . . . . . . . . . . . . . . . 22
M Second tier distributions . . . . . .
Minimum taxable income . . . . . . 23
N
net operating loss . . . . . . . . . . . . 23
Nonexempt charitable
deduction . . . . . . . . . . . . . . . . . . 16
Nonexempt charitable
trust . . . . . . . . . . . . . . . . . . . 16, 24
Nonqualified deferred
compensation plans . . . . . . . . 15
P Taxable income . . . . . . . . . . . . . . 23
Paid preparer . . . . . . . . . . . . . . . . . 7
Paid preparer authorization . . . . 8
Penalties:
Estimated tax . . . . . . . . . . . . . . 24
Failure to provide a required
TIN . . . . . . . . . . . . . . . . . . . . . . 32
Failure to provide information
Late filing of return . . . . . . . . . . 9
Late payment of tax . . . . . . . . . 9
Other . . . . . . . . . . . . . . . . . . . . . . . 9
Trust fund recovery . . . . . . . . . . 9
Underpaid estimated tax . . . . . 9
Pooled income funds . . . . . 12, 15,
24, 25
Pre-need funeral trusts . . . . . . . . 15
Q Split-interest . . . . . . . . . . . . . . . 16
Qualified disability trust . . . . . . . 23
Qualified revocable trust . . . . . . . 4
Qualified small business
stock . . . . . . . . . . . . . . . . . . . . . . 26
R
Returns:
Amended . . . . . . . . . . . . . . . . . . 16
Common trust fund . . . . . . . . . . 6
Electronic and magnetic
media . . . . . . . . . . . . . . . . . . . . 6
Final . . . . . . . . . . . . . . . . . . . . . . . 16
trust . . . . . . . . . . . . . . . . . . . . . 16
Qualified settlement
funds . . . . . . . . . . . . . . . . . . . . . 6
171
Split-interest trust . . . . . . . . . . . 16
When to file . . . . . . . . . . . . . . . . . 7
Who must file . . . . . . . . . . . . . . . 4
Revocable Living Trusts:
Section 645 Election . . . . . . . . 17
S
26
Separate share rule . . . . . . . . . . 25
Special filing instructions:
Bankruptcy estates . . . . . . . . . 14
Electing small business
trusts . . . . . . . . . . . . . . . . . . . . 12
Grantor trusts . . . . . . . . . . . . . . 11
Pooled income funds . . . . . . . 12
Split-interest trust . . . . . . . . . . . . . 16
Substitute forms . . . . . . . . . . . . . . 32
T
Tax rate schedule . . . . . . . . . . . . 27
Throwback years . . . . . . . . . . . . . 30
Trusts . . . . . . . . . . . . . . . . . . . . . . . . 4
Alaska Native Settlement . . . . 6
Blind . . . . . . . . . . . . . . . . . . . . . . 17
Common trust fund . . . . . . . . . . 6
Complex . . . . . . . . . . . . . . . . . . . 32
Domestic . . . . . . . . . . . . . . . . . . . 4
Exemption for . . . . . . . . . . . . . . 23
Foreign . . . . . . . . . . . . . . . . . . . . 29
Inter vivos . . . . . . . . . . . . . . . . 2, 4
Nonexempt charitable . . . . . 16,
24
Pre-need funeral . . . . . . . . . . . 15
Qualified disability . . . . . . . . . . 23
Qualified revocable . . . . . . . . . . 4
Simple . . . . . . . . . . . . . . . . . . . . . 32
Testamentary . . . . . . . . . . . . . 2, 4
Who must file . . . . . . . . . . . . 4, 32
W
Where to file . . . . . . . . . . . . . . . . . . 7
Who must file:
Bankruptcy estate . . . . . . . . . . 13
Decedent’s estate . . . . . . . . . . . 4
Trust . . . . . . . . . . . . . . . . . . . . . . . 4
Withholding on foreign
person . . . . . . . . . . . . . . . . . . . . . 25
■
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1041_Prep_Book_10.indb 172 10/19/2009 10:14:33 AM

 P U B L I C AT I O N 5 5 9 173

Publication 559
Cat. No. 15107U Contents
Department What’s New . . . . . . . . . . . . . . . . . . . . . 2
of the
Treasury
Internal
Survivors, Reminders . . . . . . . . . . . . . . . . . . . . . .
Introduction . . . . . . . . . . . . . . . . . . . . .
2
2
Revenue
Service Executors, and Personal Representative . . . . . . . . . . . . 2
Duties . . . . . . . . . . . . . . . . . . . . . . . 2

Administrators Fees Received by Personal

Representatives . . . . . . . . . . . . . 3
Final Return for Decedent . . . . . . . . . . . 3
Filing Requirements . . . . . . . . . . . . ..3
For use in preparing Income To Include . . . . . . . . . . . . . ..4
Exemptions and Deductions . . . . . . . ..5

2008 Returns Credits, Other Taxes, and

Payments . . . . . . . . . . . . ..... 6
Name, Address, and Signature . ......7
When and Where To File . . . . . ......7
Tax Forgiveness for Armed
Forces Members, Victims of
Terrorism, and Astronauts . ..... 7
Filing Reminders . . . . . . . . . . ......8
Other Tax Information . . . . . . . . . .... 8
Tax Benefits for Survivors . . . . . .....8
Income in Respect of a Decedent .....9
Deductions in Respect of a
Decedent . . . . . . . . . . . . . . . . . 11
Estate Tax Deduction . . . . . . . . . . . . 11
Gifts, Insurance, and Inheritances . . . . 12
Other Items of Income . . . . . . . . . . . 14
Income Tax Return of an
Estate — Form 1041 . . . . . . . . . . . . 15
Filing Requirements . . . . . . . . . . . . . 15
Income To Include . . . . . . . . . . . . . . 16
Exemption and Deductions . . . . . . . . 17
Credits, Tax, and Payments . . . . . . . . 19
Name, Address, and Signature . . . . . . 20
When and Where To File . . . . . . . . . . 20
Distributions to Beneficiaries
From an Estate . . . . . . . . . . . . . . . . 20
Income That Must Be Distributed
Currently . . . . . . . . . . . . . . . . . . 20
Other Amounts Distributed . . . . . . . . . 21
Discharge of a Legal Obligation . . . . . 21
Character of Distributions . . . . . . . . . 21
How and When To Report . . . . . . . . . 21
Bequest . . . . . . . . . . . . . . . . . . . . . 22
Termination of Estate . . . . . . . . . . . . 23
Form 706 . . . . . . . . . . . . . . . . . . . . . . . 24
Comprehensive Example . . . . . . . . . . . 24
Final Return for Decedent . . . . . . . . . 24
Income Tax Return of an
Estate — Form 1041 . . . . . . . . . . 25
Table A. Checklist of Forms and
Due Dates . . . . . . . . . . . . . . . . . . . 41

Get forms and other information Table B. Worksheet To Reconcile

Amounts Reported in Name of
faster and easier by: Decedent . . . . . . . . . . . . . . . . . . . . 42
How To Get Tax Help . . . . . . . . . . . . . . 43
Internet www.irs.gov
Index . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Mar 20, 2009

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 174 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
What’s New
Requests for extension to file Form 1041.
The automatic extension of time to file Form
1041, U.S. Income Tax Return for Estates and
Trusts, has been decreased from six months to
five months. You can request an automatic
5-month extension of time to file Form 1041 by
filing Form 7004, Application for Automatic Ex-
tension of Time To File Certain Business In-
come Tax, Information, and Other Returns.
Reminders
Throughout this publication, section references
are to the Internal Revenue Code unless other-
wise noted.
Estate tax return. Generally, if the decedent
died during 2008, an estate tax return (Form
706) must be filed if the gross estate is more
than $2,000,000.
Estate tax repeal. The estate tax is repealed
for decedents dying after 2009 and before 2011.
Consistent treatment of estate and trust
items. Beneficiaries must generally treat es-
tate items the same way on their individual re-
turns as they are treated on the estate’s return.
Individual taxpayer identification number
(ITIN). The IRS will issue an ITIN to a nonresi-
dent or resident alien who does not have and is
not eligible to get a social security number
(SSN). To apply for an ITIN, file Form W-7,
Application for IRS Individual Taxpayer Identifi-
cation Number, with the IRS. It may take up to 6
to 10 weeks to get an ITIN.
An ITIN is for tax use only. It does not entitle
the holder to social security benefits or change
the holder’s employment or immigration status
under U.S. law.
Photographs of missing children. The Inter-
nal Revenue Service is a proud partner with the
National Center for Missing and Exploited Chil-
dren. Photographs of missing children selected
by the Center may appear in this publication on
pages that would otherwise be blank. You can
help bring these children home by looking at the
photographs and calling 1-800-THE-LOST
(1-800-843-5678) if you recognize a child.
Introduction
This publication is designed to help those in
charge of the property (estate) of an individual
who has died (decedent). It shows them how to
complete and file federal income tax returns and
points out their responsibility to pay any taxes
due.
A comprehensive example, using tax forms,
is included near the end of this publication. Also
included at the end of this publication are the
following items.
• A checklist of the forms you may need and
their due dates.
Page 2
1041_Prep_Book_10.indb 174
• A worksheet to reconcile amounts re-
ported in the decedent’s name on informa-
tion Forms W-2, 1099-INT, 1099-DIV, etc.
The worksheet will help you correctly de-
termine the income to report on the dece-
dent’s final return and on the return for
either the estate or a beneficiary.
Comments and suggestions. We welcome
your comments about this publication and your
suggestions for future editions.
You can write to us at the following address:
Internal Revenue Service
SE:W:CAR:MP:T:T:SP
1111 Constitution Ave. NW, IR-6526
Washington, DC 20224
We respond to many letters by telephone.
Therefore, it would be helpful if you would in-
clude your daytime phone number, including the
area code, in your correspondence.
You can email us at *taxforms@irs.gov. (The
asterisk must be included in the address.)
Please put “Publications Comment” on the sub-
ject line. Although we cannot respond individu-
ally to each email, we do appreciate your
feedback and will consider your comments as
we revise our tax products.
Useful Items
You may want to see:
Publication
❏ 950 Introduction to Estate and Gift
Taxes
❏ 3920 Tax Relief for Victims of Terrorist
Attacks
❏ 4492 Information for Taxpayers Affected
by Hurricanes Katrina, Rita, and
Wilma
Form (and Instructions)
❏ 1040 U.S. Individual Income Tax Return
❏ 1041 U.S. Income Tax Return for Estates
and Trusts
❏ 706 United States Estate (and
Generation-Skipping Transfer) Tax
Return
❏ 1310 Statement of Person Claiming
Refund Due a Deceased Taxpayer
See How To Get Tax Help near the end of
this publication for information about getting
publications and forms.
Personal
Representative
A personal representative of an estate is an
executor, administrator, or anyone who is in
charge of the decedent’s property. Generally, an
executor (or executrix) is named in a decedent’s
will to administer the estate and distribute
properties as the decedent has directed. An
administrator (or administratrix) is usually ap-
pointed by the court if no will exists, if no execu-
tor was named in the will, or if the named
executor cannot or will not serve.
In general, an executor and an administrator
perform the same duties and have the same
responsibilities.
For estate tax purposes, if there is no execu-
tor or administrator appointed, qualified, and
acting within the United States, the term execu-
tor includes anyone in actual or constructive
possession of any property of the decedent. It
includes, among others, the decedent’s agents
and representatives; safe-deposit companies,
warehouse companies, and other custodians of
property in this country; brokers holding securi-
ties of the decedent as collateral; and the debt-
ors of the decedent who are in this country.
A personal representative for a decedent’s
estate can be an executor, administrator, or any-
one in charge of the decedent’s property, so the
term personal representative will be used
throughout this publication.
Duties
The primary duties of a personal representative
are to collect all the decedent’s assets, pay the
creditors, and distribute the remaining assets to
the heirs or other beneficiaries.
The personal representative also must per-
form the following duties.
• Apply for an employer identification num-
ber (EIN) for the estate.
• File any income tax return and the estate
tax return when due.
• Pay the tax determined up to the date of
discharge from duties.
Other duties of the personal representative in
federal tax matters are discussed in other sec-
tions of this publication. If any beneficiary is a
nonresident alien, see Publication 515, With-
holding of Tax on Nonresident Aliens and For-
eign Entities, for information on the personal
representative’s duties as a withholding agent.
Penalty. There is a penalty for failure to file
a tax return when due unless the failure is due to
reasonable cause. Reliance on an agent (attor-
ney, accountant, etc.) is not reasonable cause
for late filing. It is the personal representative’s
duty to file the returns for the decedent and the
estate when due.
Identification number. The first action you
should take if you are the personal representa-
tive for the decedent is to apply for an EIN for the
estate. You should apply for this number as
soon as possible because you need to enter it
on returns, statements, and other documents
that you file concerning the estate. You also
must give the number to payers of interest and
dividends and other payers who must file a re-
turn concerning the estate.
You can get an EIN by applying online at
www.irs.gov/businesses or by calling
1-800-829-4933, Monday through Friday. Gen-
erally, if you apply online, you will receive your
EIN immediately upon completing the applica-
tion. You can also apply using Form SS-4, Appli-
cation for Employer Identification Number.
Generally, if you apply by mail, it takes about 4
weeks to get your EIN. See the form instructions
for other ways to apply.
Payers of interest and dividends report
amounts on Forms 1099 using the identification
number of the person to whom the account is
payable. After a decedent’s death, the Forms
Publication 559 (2008)
10/19/2009 10:14:35 AM

1099 must reflect the identification number of
the estate or beneficiary to whom the amounts
are payable. As the personal representative
handling the estate, you must furnish this identi-
fication number to the payer. For example, if
interest is payable to the estate, the estate’s EIN
number must be provided to the payer and used
to report the interest on Form 1099-INT, Interest
Income. If the interest is payable to a surviving
joint owner, the survivor’s identification number
must be provided to the payer and used to report
the interest.
If the estate or a survivor may receive inter-
est or dividends after you inform the payer of the
decedent’s death, the payer should give you (or
the survivor) a Form W-9, Request for Taxpayer
Identification Number and Certification (or a sim-
ilar substitute form). Complete this form to in-
form the payer of the estate’s (or if completed by
the survivor, the survivor’s) identification num-
ber and return it to the payer.
The deceased individual’s identifying num-
ber must not be used to file an individual tax
return after the decedent’s final tax return. It also
must not be used to make estimated tax pay-
ments for a tax year after the year of death.
Penalty. If you do not include the EIN or the
taxpayer identification number of another per-
son where it is required on a return, statement,
or other document, you are liable for a penalty
for each failure, unless you can show reasona-
ble cause. You also are liable for a penalty if you
do not give the taxpayer identification number of
another person when required on a return, state-
ment, or other document.
Notice of fiduciary relationship. The term
fiduciary means any person acting for another
person. It applies to persons who have positions
of trust on behalf of others. A personal represen-
tative for a decedent’s estate is a fiduciary.
If you are appointed to act in any fiduciary
capacity for another, you must file a written no-
tice with the IRS stating this. Form 56, Notice
Concerning Fiduciary Relationship, can be used
for this purpose. The instructions and other re-
quirements are given on the back of the form.
File Form 56 as soon as all of the necessary
information (including the EIN) is available. It
notifies the IRS that, as the fiduciary, you are
assuming the powers, rights, duties, and privi-
leges of the decedent, and allows the IRS to mail
to you all tax notices concerning the person (or
estate) you represent. The notice remains in
effect until you notify the IRS (by filing another
Form 56) that your relationship to the estate has
terminated.
Request for prompt assessment (charge) of
tax. The IRS ordinarily has 3 years from the
date an income tax return is filed, or its due date,
whichever is later, to charge any additional tax
that is due. However, as a personal representa-
tive, you may request a prompt assessment of
tax after the return has been filed. This reduces
the time for making the assessment to 18
months from the date the written request for
prompt assessment was received. This request
can be made for any tax return (except the
estate tax) of the decedent or the decedent’s
estate. This may permit a quicker settlement of
the tax liability of the estate and an earlier final
distribution of the assets to the beneficiaries.
Publication 559 (2008)
1041_Prep_Book_10.indb 175
Form 4810. Form 4810, Request for Prompt
Assessment Under Internal Revenue Code Sec-
tion 6501(d), can be used for making this re-
quest. It must be filed separately from any other
document.
As the personal representative for the dece-
dent’s estate, you are responsible for any addi-
tional taxes that may be due. You can request
prompt assessment of any of the decedent’s
taxes (other than federal estate taxes) for any
years for which the statutory period for assess-
ment is open. This applies even though the
returns were filed before the decedent’s death.
Failure to report income. If you or the de-
cedent failed to report substantial amounts of
gross income (more than 25% of the gross in-
come reported on the return) or filed a false or
fraudulent return, your request for prompt as-
sessment will not shorten the period during
which the IRS may assess the additional tax.
However, such a request may relieve you of
personal liability for the tax if you did not have
knowledge of the unpaid tax.
Request for discharge from personal liability
for tax. An executor can make a request for
discharge from personal liability for a decedent’s
income, gift, and estate taxes. The request must
be made after the returns for those taxes are
filed. To make the request, file Form 5495, Re-
quest for Discharge From Personal Liability
Under Internal Revenue Code Section 2204 or
6905. For this purpose, an executor is an execu-
tor or administrator that is appointed, qualified,
and acting within the United States.
Within 9 months after receipt of the request,
the IRS will notify the executor of the amount of
taxes due. If this amount is paid, the executor
will be discharged from personal liability for any
future deficiencies. If the IRS has not notified the
executor, he or she will be discharged from
personal liability at the end of the 9-month pe-
riod.
Even if the executor is discharged from
!
CAUTION
personal liability, the IRS will still be
able to assess tax deficiencies against
the executor to the extent that he or she still has
any of the decedent’s property.
Insolvent estate. Generally, if a decedent’s
estate is insufficient to pay all the decedent’s
debts, the debts due the United States must be
paid first. Both the decedent’s federal income
tax liabilities at the time of death and the estate’s
income tax liability are debts due the United
States. The personal representative of an insol-
vent estate is personally responsible for any tax
liability of the decedent or of the estate if he or
she had notice of such tax obligations or had
failed to exercise due care in determining if such
obligations existed before distribution of the es-
tate’s assets and before being discharged from
duties. The extent of such personal responsibil-
ity is the amount of any other payments made
before paying the debts due the United States,
except where such other debt paid has priority
over the debts due the United States. The in-
come tax liabilities need not be formally as-
sessed for the personal representative to be
liable if he or she was aware or should have
been aware of their existence.
P U B L I C AT I O N 5 5 9 175
Fees Received by
Personal Representatives
All personal representatives must include in
their gross income fees paid to them from an
estate. If paid to a professional executor or ad-
ministrator, self-employment tax also applies to
such fees. For a nonprofessional executor or
administrator (a person serving in such capacity
in an isolated instance, such as a friend or rela-
tive of the decedent), self-employment tax only
applies if a trade or business is included in the
estate’s assets, the executor actively partici-
pates in the business, and the fees are related to
operation of the business.
Final Return
for Decedent
The personal representative (defined earlier)
must file the final income tax return (Form 1040)
of the decedent for the year of death and any
returns not filed for preceding years. A surviving
spouse, under certain circumstances, may have
to file the returns for the decedent. See Joint
Return, later.
Return for preceding year. If an individual
died after the close of the tax year, but before
the return for that year was filed, the return for
the year just closed will not be the final return.
The return for that year will be a regular return
and the personal representative must file it.
Example. Samantha Smith died on March
21, 2008, before filing her 2007 tax return. Her
personal representative must file her 2007 re-
turn by April 15, 2008. Her final tax return is due
April 15, 2009.
Filing Requirements
The gross income, age, and filing status of a
decedent generally determine whether a return
must be filed. Gross income usually is all income
received by an individual in the form of money,
goods, property, and services that is not
tax-exempt. It includes gross receipts from
self-employment, but if the business involves
manufacturing, merchandising, or mining, sub-
tract any cost of goods sold. In general, filing
status depends on whether the decedent was
considered single or married at the time of
death. See the income tax return instructions or
Publication 501, Exemptions, Standard Deduc-
tion, and Filing Information.
Refund
A return should be filed to obtain a refund if tax
was withheld from salaries, wages, pensions, or
annuities, or if estimated tax was paid, even if a
return is not required to be filed. Also, the dece-
dent may be entitled to other credits that result in
a refund. These advance payments of tax and
credits are discussed later under Credits, Other
Taxes, and Payments.
Form 1310. Generally, a person who is filing a
return for a decedent and claiming a refund must
file Form 1310 with the return. However, if the
person claiming the refund is a surviving spouse
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 176 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
filing a joint return with the decedent, or a
court-appointed or certified personal represen-
tative filing an original return for the decedent,
Form 1310 is not needed. The personal repre-
sentative must attach to the return a copy of the
court certificate showing that he or she was
appointed the personal representative.
If the personal representative is filing a claim
for refund on Form 1040X, Amended U.S. Indi-
vidual Income Tax Return, or Form 843, Claim
for Refund and Request for Abatement, and the
court certificate has already been filed with the
IRS, attach Form 1310 and write “Certificate
Previously Filed” at the bottom of the form.
Example. Mr. Green died before filing his
tax return. You were appointed the personal
representative for Mr. Green’s estate, and you
file his Form 1040 showing a refund due. You do
not need Form 1310 to claim the refund if you
attach a copy of the court certificate showing you
were appointed the personal representative.
If you are a surviving spouse and you
TIP receive a tax refund check in both your
name and your deceased spouse’s
name, you can have the check reissued in your
name alone. Return the joint-name check and a
completed Form 1310 to your local IRS office or
the service center where you mailed your return.
A new check will be issued in your name and
mailed to you.
Death certificate. When filing the decedent’s
final income tax return, do not attach the death
certificate or other proof of death to the final
return. Instead, keep it for your records and
provide it if requested.
Nonresident Alien
If the decedent was a nonresident alien who
would have had to file Form 1040NR, U.S. Non-
resident Alien Income Tax Return, you must file
that form for the decedent’s final tax year. See
the instructions for Form 1040NR for the filing
requirements, due date, and where to file.
Joint Return
Generally, the personal representative and the
surviving spouse can file a joint return for the
decedent and the surviving spouse. However,
the surviving spouse alone can file the joint
return if no personal representative has been
appointed before the due date for filing the final
joint return for the year of death. This also ap-
plies to the return for the preceding year if the
decedent died after the close of the preceding
tax year and before filing the return for that year.
The income of the decedent that was includible
on his or her return for the year up to the date of
death (see Income To Include, later) and the
income of the surviving spouse for the entire
year must be included in the final joint return.
A final joint return with the decedent cannot
be filed if the surviving spouse remarried before
the end of the year of the decedent’s death. The
filing status of the decedent in this instance is
married filing a separate return.
For information about tax benefits to which a
surviving spouse may be entitled, see Tax Ben-
efits for Survivors, later, under Other Tax Infor-
mation.
Page 4
1041_Prep_Book_10.indb 176
Personal representative may revoke joint re-
turn election. A court-appointed personal
representative may revoke an election to file a
joint return that was previously made by the
surviving spouse alone. This is done by filing a
separate return for the decedent within one year
from the due date of the return (including any
extensions). The joint return made by the surviv-
ing spouse will then be regarded as the separate
return of that spouse by excluding the dece-
dent’s items and refiguring the tax liability.
Relief from joint liability. In some cases,
one spouse may be relieved of joint liability for
tax, interest, and penalties on a joint return for
items of the other spouse that were incorrectly
reported on the joint return. If the decedent qual-
ified for this relief while alive, the personal repre-
sentative can pursue an existing request, or file
a request, for relief from joint liability. For infor-
mation on requesting this relief, see Publication
971, Innocent Spouse Relief.
Income To Include
The decedent’s income includible on the final
return is generally determined as if the person
were still alive except that the taxable period is
usually shorter because it ends on the date of
death. The method of accounting regularly used
by the decedent before death also determines
the income includible on the final return. This
section explains how some types of income are
reported on the final return.
For more information about accounting
methods, see Publication 538, Accounting Peri-
ods and Methods.
Under the Cash Method
If the decedent accounted for income under the
cash method, only those items actually or con-
structively received before death are included in
the final return.
Constructive receipt of income. Interest
from coupons on the decedent’s bonds was con-
structively received by the decedent if the cou-
pons matured in the decedent’s final tax year,
but had not been cashed. Include the interest in
the final return.
Generally, a dividend was constructively re-
ceived if it was available for use by the decedent
without restriction. If the corporation customarily
mailed its dividend checks, the dividend was
includible when received. If the individual died
between the time the dividend was declared and
the time it was received in the mail, the decedent
did not constructively receive it before death. Do
not include the dividend in the final return.
Under an Accrual Method
Generally, under an accrual method of account-
ing, income is reported when earned.
If the decedent used an accrual method, only
the income items normally accrued before death
are included in the final return.
Partnership Income
The death of a partner closes the partnership’s
tax year for that partner. Generally, it does not
close the partnership’s tax year for the remain-
ing partners. The decedent’s distributive share
of partnership items must be figured as if the
partnership’s tax year ended on the date the
partner died. To avoid an interim closing of the
partnership books, the partners can agree to
estimate the decedent’s distributive share by
prorating the amounts the partner would have
included for the entire partnership tax year.
On the decedent’s final return, include the
decedent’s distributive share of partnership
items for the following periods.
1. The partnership’s tax year that ended
within or with the decedent’s final tax year
(the year ending on the date of death).
2. The period, if any, from the end of the
partnership’s tax year in (1) to the dece-
dent’s date of death.
Example. Mary Smith was a partner in XYZ
partnership and reported her income on a tax
year ending December 31. The partnership uses
a tax year ending June 30. Mary died August 31,
2008, and her estate established its tax year
through August 31.
The distributive share of partnership items
based on the decedent’s partnership interest is
reported as follows.
• Final Return for the Decedent — January 1
through August 31, 2008, includes XYZ
partnership items from (a) the partnership
tax year ending June 30, 2008, and (b) the
partnership tax year beginning July 1,
2008, and ending August 31, 2008 (the
date of death).
• Income Tax Return of the Estate — Sep-
tember 1, 2008, through August 31, 2009,
includes XYZ partnership items for the pe-
riod September 1, 2008, through June 30,
2009.
S Corporation Income
If the decedent was a shareholder in an S corpo-
ration, include on the final return the decedent’s
share of the S corporation’s items of income,
loss, deduction, and credit for the following peri-
ods.
1. The corporation’s tax year that ended
within or with the decedent’s final tax year
(the year ending on the date of death).
2. The period, if any, from the end of the
corporation’s tax year in (1) to the dece-
dent’s date of death.
Self-Employment Income
Include self-employment income actually or
constructively received or accrued, depending
on the decedent’s accounting method. For
self-employment tax purposes only, the dece-
dent’s self-employment income will include the
decedent’s distributive share of a partnership’s
income or loss through the end of the month in
which death occurred. For this purpose, the
partnership’s income or loss is considered to be
earned ratably over the partnership’s tax year.
Publication 559 (2008)
10/19/2009 10:14:38 AM

Community Income
If the decedent was married and domiciled in a
community property state, half of the income
received and half of the expenses paid during
the decedent’s tax year by either the decedent
or spouse may be considered to be the income
and expenses of the other. For more informa-
tion, see Publication 555, Community Property.
Interest and Dividend Income
(Forms 1099)
A Form 1099 should be received for the dece-
dent reporting interest and dividends earned
before death and included on the decedent’s
final return. A separate Form 1099 should show
the interest and dividends earned after the date
of the decedent’s death and paid to the estate or
other recipient that must include those amounts
on its return. You can request corrected Forms
1099 if these forms do not properly reflect the
right recipient or amounts.
For example, a Form 1099-INT reporting in-
terest payable to the decedent may include in-
come that should be reported on the final
income tax return of the decedent, as well as
income that the estate or other recipient should
report, either as income earned after death or as
income in respect of the decedent (discussed
later). For income earned after death, you
should ask the payer for a Form 1099 that prop-
erly identifies the recipient (by name and identifi-
cation number) and the proper amount. If that is
not possible, or if the form includes an amount
that represents income in respect of the dece-
dent, report the interest as shown next under
How to report.
See U.S. savings bonds acquired from dece-
dent under Income in Respect of the Decedent,
later, for information on savings bond interest
that may have to be reported on the final return.
How to report. If you are preparing the dece-
dent’s final return and you have received a Form
1099-INT for the decedent that includes
amounts belonging to the decedent and to an-
other recipient (the decedent’s estate or another
beneficiary), report the total interest shown on
Form 1099-INT on Schedule 1 (Form 1040A) or
on Schedule B (Form 1040). Next, enter a sub-
total of the interest shown on Forms 1099, and
the interest reportable from other sources for
which you did not receive Forms 1099. Then,
show any interest (including any interest you
receive as a nominee) belonging to another re-
cipient separately and subtract it from the sub-
total. Identify the amount of this adjustment as
“Nominee Distribution” or other appropriate des-
ignation.
Report dividend income for which you re-
ceived a Form 1099-DIV, Dividends and Distri-
butions, on the appropriate schedule using the
same procedure.
Note. If the decedent received amounts as a
nominee, you must give the actual owner a Form
1099, unless the owner is the decedent’s
spouse. See General Instructions for Forms
1099, 1098, 5498, and W-2G for more informa-
tion on filing Forms 1099.
Publication 559 (2008)
1041_Prep_Book_10.indb 177
HSA, Archer MSA, or a Medicare
Advantage MSA
The treatment of a health savings account
(HSA), an Archer MSA, or a Medicare Advan-
tage MSA at the death of the account holder,
depends on who acquires the interest in the
account. If the decedent’s estate acquires the
interest, the fair market value (FMV) of the as-
sets in the account on the date of death is
included in income on the decedent’s final re-
turn. The estate tax deduction, discussed later,
does not apply to this amount.
If a beneficiary acquires the interest, see the
discussion under Income in Respect of a Dece-
dent, later. For other information on HSAs,
Archer MSAs, or Medicare Advantage MSAs,
see Publication 969, Health Savings Accounts
and Other Tax-Favored Health Plans.
Coverdell Education Savings
Account (ESA)
Generally, the balance in a Coverdell ESA must
be distributed within 30 days after the individual
for whom the account was established reaches
age 30, or dies, whichever is earlier. The treat-
ment of the Coverdell ESA at the death of an
individual under age 30 depends on who ac-
quires the interest in the account. If the dece-
dent’s estate acquires the interest, the earnings
on the account must be included on the final
income tax return of the decedent. The estate
tax deduction, discussed later, does not apply to
this amount. If a beneficiary acquires the inter-
est, see the discussion under Income in Respect
of a Decedent, later.
The age 30 limitation does not apply if the
individual for whom the account was established
or the beneficiary that acquires the account is an
individual with special needs. This includes an
individual who, because of a physical, mental, or
emotional condition (including a learning disabil-
ity), requires additional time to complete his or
her education.
For more information on Coverdell ESAs,
see Publication 970, Tax Benefits for Education.
Accelerated Death Benefits
Accelerated death benefits are amounts re-
ceived under a life insurance contract before the
death of the insured individual. These benefits
also include amounts received on the sale or
assignment of the contract to a viatical settle-
ment provider.
Generally, if the decedent received acceler-
ated death benefits either on his or her own life
or on the life of another person, those benefits
are not included in the decedent’s income. This
exclusion applies only if the insured was a termi-
nally or chronically ill individual. For more infor-
mation, see the discussion under Gifts,
Insurance, and Inheritances under Other Tax
Information, later.
Exemptions
and Deductions
Generally, the rules for exemptions and deduc-
tions allowed to an individual also apply to the
decedent’s final income tax return. Show on the
final return deductible items the decedent paid
P U B L I C AT I O N 5 5 9 177
(or accrued, if the decedent reported deductions
on an accrual method) before death. This sec-
tion contains a detailed discussion of medical
expenses because, under certain conditions,
the tax treatment can be different for the medical
expenses of the decedent. See Medical Ex-
penses, later.
Exemptions
You can claim the decedent’s personal exemp-
tion on the final income tax return. If the dece-
dent was another person’s dependent (for
example, a parent’s), you cannot claim the per-
sonal exemption on the decedent’s final return.
Standard Deduction
If you do not itemize deductions on the final
return, the full amount of the appropriate stan-
dard deduction is allowed regardless of the date
of death. For information on the appropriate
standard deduction, see the income tax return
instructions or Publication 501.
Medical Expenses
Medical expenses paid before death by the de-
cedent are deductible, subject to limits, on the
final income tax return if deductions are item-
ized. This includes expenses for the decedent,
as well as for the decedent’s spouse and depen-
dents.
Qualified medical expenses are not de-
!
CAUTION
ductible if paid with a tax-free distribu-
tion from an HSA or an Archer MSA.
Election for decedent’s expenses. Medical
expenses that were not paid before death are
liabilities of the estate and are shown on the
federal estate tax return (Form 706). However, if
medical expenses for the decedent are paid out
of the estate during the 1-year period beginning
with the day after death, you can elect to treat all
or part of the expenses as paid by the decedent
at the time they were incurred.
If you make the election, you can claim all or
part of the expenses on the decedent’s income
tax return, if deductions are itemized, rather than
on the federal estate tax return (Form 706). You
can deduct expenses incurred in the year of
death on the final income tax return. You should
file an amended return (Form 1040X) for medi-
cal expenses incurred in an earlier year, unless
the statutory period for filing a claim for that year
has expired.
The amount you can deduct on the income
tax return is the amount above 7.5% of adjusted
gross income. The amounts not deductible be-
cause of this percentage cannot be claimed on
the federal estate tax return.
Making the election. You make the elec-
tion by attaching a statement, in duplicate, to the
decedent’s income tax return or amended re-
turn. The statement must state that you have not
claimed the amount as an estate tax deduction,
and that the estate waives the right to claim the
amount as a deduction. This election applies
only to expenses incurred for the decedent, not
to expenses incurred to provide medical care for
dependents.
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Example. Richard Brown used the cash
method of accounting and filed his income tax
return on a calendar year basis. Mr. Brown died
on June 1, 2008, after incurring $800 in medical
expenses. Of that amount, $500 was incurred in
2007 and $300 was incurred in 2008. Richard
itemized his deductions when he filed his 2007
income tax return. The personal representative
of the estate paid the entire $800 liability in
August 2008.
The personal representative may file an
amended return (Form 1040X) for 2007 claiming
the $500 medical expense as a deduction, sub-
ject to the 7.5% limit. The $300 of expenses
incurred in 2008 can be deducted on the final
income tax return if deductions are itemized,
subject to the 7.5% limit. The personal represen-
tative must file a statement in duplicate with
each return stating that these amounts have not
been claimed on the federal estate tax return
(Form 706), and waiving the right to claim such a
deduction on Form 706 in the future.
Medical expenses not paid by estate. If you
paid medical expenses for your deceased
spouse or dependent, claim the expenses on
your tax return for the year in which you paid
them, whether they are paid before or after the
decedent’s death. If the decedent was a child of
divorced or separated parents, the medical ex-
penses can usually be claimed by both the cus-
todial and noncustodial parent to the extent paid
by that parent during the year.
Insurance reimbursements. Insurance reim-
bursements of previously deducted medical ex-
penses due a decedent at the time of death and
later received by the decedent’s estate are in-
cludible in the income tax return of the estate
(Form 1041) for the year the reimbursements
are received. The reimbursements are also in-
cludible in the decedent’s gross estate.
Deduction for Losses
A decedent’s net operating loss deduction from
a prior year and any capital losses (including
capital loss carryovers) can be deducted only on
the decedent’s final income tax return. A net
operating loss on the decedent’s final income
tax return can be carried back to prior years.
(See Publication 536, Net Operating Losses
(NOLs) for Individuals, Estates, and Trusts.)
You cannot deduct any unused net operating
loss or capital loss on the estate’s income tax
return.
At-risk loss limits. Special at-risk rules apply
to most activities that are engaged in as a trade
or business or for the production of income.
These rules limit the deductible loss to the
amount for which the individual was considered
at risk in the activity. An individual generally will
be considered at risk to the extent of the money
and the adjusted basis of property that he or she
contributed to the activity and certain amounts
the individual borrowed for use in the activity. An
individual will be considered at risk for amounts
borrowed only if he or she was personally liable
for the repayment or if the amounts borrowed
were secured by property other than that used in
the activity. The individual is not considered at
risk for borrowed amounts if the lender has an
interest in the activity or if the lender is related to
a person who has an interest in the activity. For
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1041_Prep_Book_10.indb 178
more information, see Publication 925, Passive
Activity and At-Risk Rules.
Passive activity rules. A passive activity is
any trade or business activity in which the tax-
payer does not materially participate. To deter-
mine material participation, see Publication 925.
Rental activities are passive activities regard-
less of the taxpayer’s participation, unless the
taxpayer meets certain eligibility requirements.
Individuals, estates, and trusts can offset
passive activity losses only against passive ac-
tivity income. Passive activity losses or credits
that are not allowed in one tax year can be
carried forward to the next year.
If a passive activity interest is transferred
because a taxpayer dies, the accumulated un-
used passive activity losses are allowed as a
deduction against the decedent’s income in the
year of death. Losses are allowed only to the
extent they are greater than the excess of the
transferee’s (recipient of the interest trans-
ferred) basis in the property over the decedent’s
adjusted basis in the property immediately
before death. The portion of the losses that is
equal to the excess is not allowed as a deduc-
tion for any tax year.
Use Form 8582, Passive Activity Loss Limi-
tations, to summarize losses and income from
passive activities and to figure the amounts al-
lowed. For more information, see Publication
925.
Credits, Other Taxes,
and Payments
This section includes brief discussions of some
of the tax credits, types of taxes that may be
owed, income tax withheld, and estimated tax
payments that are reported on the final return of
a decedent.
Credits
You can claim on the final income tax return any
tax credits that applied to the decedent before
death. Some of these credits are discussed
next.
Earned income credit. If the decedent was
an eligible individual, you can claim the earned
income credit on the decedent’s final return
even though the return covers less than 12
months. If the allowable credit is more than the
tax liability for the year, the excess is refunded.
For more information, see Publication 596,
Earned Income Credit (EIC).
Credit for the elderly or the disabled. This
credit is allowable on a decedent’s final income
tax return if the decedent met both of the follow-
ing requirements in the year of death. The dece-
dent:
• Was a “qualified individual,” and
• Had income (adjusted gross income (AGI)
and nontaxable social security and pen-
sions) less than certain limits.
For details on qualifying for or figuring the
credit, see Publication 524, Credit for the Elderly
or the Disabled.
Child tax credit. If the decedent had a qualify-
ing child, you may be able to claim the child tax
credit on the decedent’s final return even though
the return covers less than 12 months. You may
be able to claim the additional child tax credit
and get a refund if the credit is more than the
decedent’s liability. For more information, see
your income tax form instructions.
Adoption credit. Depending upon when the
adoption was finalized, this credit may be taken
upon a decedent’s final income tax return if the
decedent:
• Adopted an eligible child and paid quali-
fied adoption expenses or
• Has a carryforward of an adoption credit
from a prior year.
Also, if the decedent is survived by a spouse
who meets the filing status of qualifying
widow(er), unused adoption credit may be car-
ried forward and used following the death of the
decedent. See Form 8839, Qualified Adoption
Expenses, and its Instructions for more details.
General business tax credit. The general
business credit available to a taxpayer is limited.
Any credit arising in a tax year beginning before
1998 that has not been used up can be carried
forward for up to 15 years. Any unused credit
arising in a tax year beginning after 1997 has a
1-year carryback and a 20-year carryforward
period.
After the carryforward period, a deduction
may be allowed for any unused business credit.
If the taxpayer dies before the end of the car-
ryforward period, the deduction generally is al-
lowed in the year of death.
For more information on the general busi-
ness credit, see Publication 334, Tax Guide for
Small Business.
Other Taxes
Taxes other than income tax that may be owed
on the final return of a decedent include
self-employment tax and alternative minimum
tax, which are reported on Form 1040.
Self-employment tax. Self-employment tax
may be owed on the final return if either of the
following applied to the decedent in the year of
death.
1. Net earnings from self-employment (ex-
cluding income described in (2)) were
$400 or more.
2. Wages from services performed as a
church employee were $108.28 or more.
Alternative minimum tax (AMT). The tax
laws give special treatment to some kinds of
income and allow special deductions and credits
for some kinds of expenses. The alternative
minimum tax (AMT) was enacted so that certain
taxpayers who benefit from these laws still pay
at least a minimum amount of tax. In general, the
AMT is the excess of the tentative minimum tax
over the regular tax shown on the return.
Form 6251. Use Form 6251, Alternative
Minimum Tax — Individuals, to determine if this
tax applies to the decedent. See the form in-
structions for information on when you must
attach the form to the tax return.
Form 8801. If the decedent paid AMT in a
previous year or had a credit carryforward, the
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decedent may be eligible for a minimum tax
credit. See Form 8801, Credit for Prior Year
Minimum Tax — Individuals, Estates, and
Trusts.
Payments of Tax
The income tax withheld from the decedent’s
salary, wages, pensions, or annuities, and the
amount paid as estimated tax, for example, are
credits (advance payments of tax) that you must
claim on the final return.
Name, Address,
and Signature
Write the word “DECEASED,” the decedent’s
name, and the date of death across the top of
the tax return. If filing a joint return, write the
name and address of the decedent and the
surviving spouse in the name and address
space. If a joint return is not being filed, write the
decedent’s name in the name space and the
personal representative’s name and address in
the remaining space.
Third party designee. You can check the
“Yes” box in the Third Party Designee area of
the return to authorize the IRS to discuss the
return with a friend, family member, or any other
person you choose. This allows the IRS to call
the person you identified as the designee to
answer any questions that may arise during the
processing of the return. It also allows the desig-
nee to perform certain actions. See the income
tax package for details.
Signature. If a personal representative has
been appointed, that person must sign the re-
turn. If it is a joint return, the surviving spouse
must also sign it. If no personal representative
has been appointed, the surviving spouse (on a
joint return) signs the return and writes in the
signature area “Filing as surviving spouse.” If no
personal representative has been appointed
and if there is no surviving spouse, the person in
charge of the decedent’s property must file and
sign the return as “personal representative.”
Paid preparer. If you pay someone to pre-
pare, assist in preparing, or review the tax re-
turn, that person must sign the return and fill in
the other blanks in the paid preparer’s area of
the return. See the income tax package for de-
tails.
When and Where To File
The final income tax return is due at the same
time the decedent’s return would have been due
had death not occurred. A final return for a
decedent who was a calendar year taxpayer is
generally due on April 15 following the year of
death, regardless of when during that year death
occurred. However, when the due date falls on a
Saturday, Sunday, or legal holiday, the return is
filed timely if filed by the next business day.
The tax return must be prepared on a form
for the year of death regardless of when during
the year death occurred.
Generally, you must file the final income tax
return of the decedent with the Internal Revenue
Service Center for the place where you live. A
tax return for a decedent can be electronically
filed. A personal representative may also obtain
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1041_Prep_Book_10.indb 179
an income tax filing extension on behalf of a
decedent.
Tax Forgiveness for
Armed Forces Members,
Victims of Terrorism, and
Astronauts
Income tax liability may be forgiven for a dece-
dent who dies due to service in a combat zone,
due to military or terrorist actions, as a result of a
terrorist attack, or while serving in the line of duty
as an astronaut.
Combat Zone
If a member of the Armed Forces of the United
States dies while in active service in a combat
zone or from wounds, disease, or injury incurred
in a combat zone, the decedent’s income tax
liability is abated (forgiven) for the entire year in
which death occurred and for any prior tax year
ending on or after the first day the person served
in a combat zone in active service. For this
purpose, a qualified hazardous duty area is
treated as a combat zone.
If the tax (including interest, additions to the
tax, and additional amounts) for these years has
been assessed, the assessment will be forgiven.
If the tax has been collected (regardless of the
date of collection), that tax will be credited or
refunded.
Any of the decedent’s income tax for tax
years before those mentioned above that re-
mains unpaid as of the actual (or presumptive)
date of death will not be assessed. If any unpaid
tax (including interest, additions to the tax, and
additional amounts) has been assessed, this
assessment will be forgiven. Also, if any tax was
collected after the date of death, that amount will
be credited or refunded.
The date of death of a member of the Armed
Forces reported as missing in action or as a
prisoner of war is the date his or her name is
removed from missing status for military pay
purposes. This is true even if death actually
occurred earlier.
For other tax information for members of the
Armed Forces, see Publication 3, Armed
Forces’ Tax Guide.
Military or Terrorist Actions
The decedent’s income tax liability is forgiven if,
at death, he or she was a military or civilian
employee of the United States who died be-
cause of wounds or injury incurred:
• While a U.S. employee, and
• In a military or terrorist action.
The forgiveness applies to the tax year in
which death occurred and for any prior tax year
in the period beginning with the year before the
year in which the wounds or injury occurred.
Example. The income tax liability of a civil-
ian employee of the United States who died in
2008 because of wounds incurred while a U.S.
employee in a terrorist attack that occurred in
1998 will be forgiven for 2008 and for all prior tax
P U B L I C AT I O N 5 5 9 179
years in the period 1997 through 2007. Refunds
are allowed for the tax years for which the period
for filing a claim for refund has not ended, as
discussed later.
Military or terrorist action defined. A military
or terrorist action means the following.
• Any terrorist activity that most of the evi-
dence indicates was directed against the
United States or any of its allies.
• Any military action involving the U.S.
Armed Forces and resulting from violence
or aggression against the United States or
any of its allies, or the threat of such vio-
lence or aggression.
Terrorist activity includes criminal offenses in-
tended to coerce, intimidate, or retaliate against
the government or civilian population. Military
action does not include training exercises. Any
multinational force in which the United States is
participating is treated as an ally of the United
States.
Determining if a terrorist activity or mili-
tary action has occurred. You may rely on
published guidance from the IRS to determine if
a particular event is considered a terrorist activ-
ity or military action.
Specified Terrorist Victim
The Victims of Terrorism Tax Relief Act of 2001
(the Act) provides tax relief for those injured or
killed as a result of terrorist attacks, certain sur-
vivors of those killed as a result of terrorist at-
tacks, and others who were affected by terrorist
attacks. Under the Act, the federal income tax
liability of those killed in the following attacks
(specified terrorist victim) is forgiven for certain
tax years.
• The April 19, 1995, terrorist attack on the
Alfred P. Murrah Federal Building
(Oklahoma City).
• The September 11, 2001, terrorist attacks.
• The terrorist attacks involving anthrax oc-
curring after September 10, 2001, and
before January 1, 2002.
The Act also exempts from federal income tax
the following types of income.
• Qualified disaster relief payments made
after September 10, 2001, to cover per-
sonal, family, living, or funeral expenses
incurred because of a terrorist attack.
• Certain disability payments received in tax
years ending after September 10, 2001 for
injuries sustained in a terrorist attack.
• Certain death benefits paid by an em-
ployer to the survivor of an employee be-
cause the employee died as a result of a
terrorist attack.
• Payments from the September 11th Victim
Compensation Fund 2001.
The Act also reduces the estate tax of individ-
uals who die as a result of a terrorist attack. See
Publication 3920, Tax Relief for Victims of Ter-
rorist Attacks, for more information.
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Astronauts
For astronauts who died in the line of duty after
December 31, 2002, legislation extended the tax
relief available under The Victims of Terrorism
Tax Relief Act of 2001 (the Act). The decedent’s
income tax liability is forgiven for the tax year in
which death occurs, and for the tax year prior to
death. For information on death benefit pay-
ments and the reduction of federal estate taxes,
see Publication 3920. However, the discussions
in that publication under Death Benefits and
Estate Tax Reduction should be modified for
astronauts (for example, by using the date of
death of the astronaut rather than September
11, 2001).
For more information on the Act, see Publi-
cation 3920.
Claim for Credit or Refund
If any of these tax-forgiveness situations applies
to a prior year tax, any tax paid for which the
period for filing a claim has not ended will be
credited or refunded. If any tax is still due, it will
be canceled. The normal period for filing a claim
for credit or refund is 3 years after the return was
filed or 2 years after the tax was paid, whichever
is later.
If death occurred in a combat zone or from
wounds, disease, or injury incurred in a combat
zone, the period for filing the claim is extended
by:
1. The amount of time served in the combat
zone (including any period in which the
individual was in missing status), plus
2. The period of continuous qualified hospital-
ization for injury from service in the combat
zone, if any, plus
3. The next 180 days.
Qualified hospitalization means any hospitaliza-
tion outside the United States and any hospitali-
zation in the United States of not more than 5
years.
This extended period for filing the claim also
applies to a member of the Armed Forces who
was deployed outside the United States in a
designated contingency operation.
Filing a claim. Use the following procedures
to file a claim.
• If a U.S. individual income tax return
(Form 1040, 1040A, or 1040EZ) has not
been filed, you should make a claim for
refund of any withheld income tax or esti-
mated tax payments by filing Form 1040.
Form W-2, Wage and Tax Statement,
must accompany all returns.
• If a U.S. individual income tax return has
been filed, you should make a claim for
refund by filing Form 1040X. You must file
a separate Form 1040X for each year in
question.
You must file these returns and claims at the
following address for regular mail (U.S. Postal
Service).
Internal Revenue Service
P.O. Box 4053
Woburn, MA 01888
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1041_Prep_Book_10.indb 180
Identify all returns and claims for refund by
writing “Iraq — KIA,” “Enduring Freedom — KIA,”
“Kosovo Operation — KIA,” “Desert Storm —
KIA,” or “Former Yugoslavia — KIA” in bold let-
ters on the top of page 1 of the return or claim.
On Forms 1040 and 1040X, write the same
phrase on the line for total tax. If the individual
was killed in a terrorist or military action, put
“KITA” on the front of the return and on the line
for total tax.
An attachment should include a computation
of the decedent’s tax liability and a computation
of the amount that is to be forgiven. On joint
returns, you must make an allocation of the tax
as described below under Joint returns. If you
cannot make a proper allocation, you should
attach a statement of all income and deductions
allocable to each spouse and the IRS will make
the proper allocation.
You must attach Form 1310 to all returns and
claims for refund. However, for exceptions to
filing Form 1310, see Form 1310 under Refund,
earlier.
You must also attach proof of death that
includes a statement that the individual was a
U.S. employee on the date of injury and on the
date of death and died as the result of a military
or terrorist action. For military and civilian em-
ployees of the Department of Defense, attach
DD Form 1300. For other U.S. civilian employ-
ees killed in the United States, attach a death
certificate and a certification (letter) from the
federal employer. For other U.S. civilian employ-
ees killed overseas, attach a certification from
the Department of State.
If you do not have enough tax information to
file a timely claim for refund, you can suspend
the period for filing a claim by filing Form 1040X.
Attach Form 1310, any required documentation
currently available, and a statement that you will
file an amended claim as soon as you have the
required tax information.
Joint returns. If a joint return was filed, only
the decedent’s part of the income tax liability is
eligible for forgiveness. Determine the dece-
dent’s tax liability as follows.
1. Figure the income tax for which the dece-
dent would have been liable if a separate
return had been filed.
2. Figure the income tax for which the spouse
would have been liable if a separate return
had been filed.
3. Multiply the joint tax liability by a fraction.
The numerator of the fraction is the
amount in (1), above. The denominator of
the fraction is the total of (1) and (2).
The amount in (3) above is the decedent’s
tax liability that is eligible for forgiveness.
Filing Reminders
To minimize the time needed to process the
decedent’s final return and issue any refund, be
sure to follow these procedures.
1. Write “DECEASED,” the decedent’s name,
and the date of death across the top of the
tax return.
2. If a personal representative has been ap-
pointed, the personal representative must
sign the return. If it is a joint return, the
surviving spouse must also sign it.
3. If you are the decedent’s spouse filing a
joint return with the decedent and no per-
sonal representative has been appointed,
write “Filing as surviving spouse” in the
area where you sign the return.
4. If no personal representative has been ap-
pointed and if there is no surviving spouse,
the person in charge of the decedent’s
property must file and sign the return as
“personal representative.”
5. To claim a refund for the decedent, do the
following.
a. If you are the decedent’s spouse filing a
joint return with the decedent, file only
the tax return to claim the refund.
b. If you are the personal representative
and the return is not a joint return filed
with the decedent’s surviving spouse,
file the return and attach a copy of the
certificate that shows your appointment
by the court. (A power of attorney or a
copy of the decedent’s will is not ac-
ceptable evidence of your appointment
as the personal representative.) If you
are filing an amended return, attach
Form 1310 and a copy of the certificate
of appointment (or, if you have already
sent the certificate of appointment to
IRS, write “Certificate Previously Filed”
at the bottom of Form 1310).
c. If you are not filing a joint return as the
surviving spouse and a personal repre-
sentative has not been appointed, file
the return and attach Form 1310.
Other Tax Information
This section contains information about the ef-
fect of an individual’s death on the income tax
liability of the survivors (including widows and
widowers), the beneficiaries, and the estate.
Tax Benefits for Survivors
Survivors can qualify for certain benefits when
filing their own income tax returns.
Joint return by surviving spouse. A surviv-
ing spouse can file a joint return for the year of
death and may qualify for special tax rates for
the following 2 years, as explained under Quali-
fying widows and widowers, later.
Decedent as your dependent. If the dece-
dent qualified as your dependent for a part of the
year before death, you can claim the exemption
for the dependent on your tax return, regardless
of when death occurred during the year.
If the decedent was your qualifying child, you
may be able to claim the child tax credit or the
earned income credit.
Qualifying widows and widowers. If your
spouse died within the 2 tax years preceding the
year for which your return is being filed, you may
be eligible to claim the filing status of qualifying
widow(er) with dependent child and qualify to
use the married-filing-jointly tax rates.
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Requirements. Generally, you qualify for
this special benefit if you meet all of the following
requirements.
• You were entitled to file a joint return with
your spouse for the year of death —
whether or not you actually filed jointly.
• You did not remarry before the end of the
current tax year.
• You have a child, stepchild, or foster child
who qualifies as your dependent for the
tax year.
• You provide more than half the cost of
maintaining your home, which is the princi-
pal residence of that child for the entire
year except for temporary absences.
Example. William Burns’ wife died in 2006.
Mr. Burns has not remarried and continued
throughout 2007 and 2008 to maintain a home
for himself and his dependent child. For 2006,
he was entitled to file a joint return for himself
and his deceased wife. For 2007 and 2008, he
qualifies to file as a qualifying widower with de-
pendent child. For later years, he may qualify to
file as a head of household.
Figuring your tax. Check the box on line 5
(Form 1040 or 1040A) under filing status on your
tax return. Use the Tax Rate Schedule or the
column in the Tax Table for Married filing jointly,
which gives you the split-income benefits.
The last year you can file jointly with, or claim
an exemption for, your deceased spouse is the
year of death.
Joint return filing rules. If you are the surviv-
ing spouse and a personal representative is
handling the estate for the decedent, you should
coordinate filing your return for the year of death
with this personal representative. See Joint Re-
turn, earlier under Final Return for Decedent.
Income in Respect
of a Decedent
All income the decedent would have received
had death not occurred that was not properly
includible on the final return, discussed earlier,
is income in respect of a decedent.
If the decedent is a specified terrorist
!
CAUTION
victim (see Specified Terrorist Victim,
earlier), income received after the date
of death and before the end of the decedent’s
tax year (determined without regard to death) is
excluded from the recipient’s gross income. This
exclusion does not apply to certain income. For
more information, see Publication 3920.
How To Report
Income in respect of a decedent must be in-
cluded in the income of one of the following:
• The decedent’s estate, if the estate re-
ceives it;
• The beneficiary, if the right to income is
passed directly to the beneficiary and the
beneficiary receives it; or
• Any person to whom the estate properly
distributes the right to receive it.
Publication 559 (2008)
1041_Prep_Book_10.indb 181
If you have to include income in re-
TIP spect of a decedent in your gross in-
come and an estate tax return (Form
706) was filed for the decedent, you may be able
to claim a deduction for the estate tax paid on
that income. See Estate Tax Deduction, later.
Example 1. Frank Johnson owned and op-
erated an apple orchard. He used the cash
method of accounting. He sold and delivered
1,000 bushels of apples to a canning factory for
$2,000, but did not receive payment before his
death. The proceeds from the sale are income in
respect of a decedent. When the estate was
settled, payment had not been made and the
estate transferred the right to the payment to his
widow. When Frank’s widow collects the $2,000,
she must include that amount in her return. It is
not reported on the final return of the decedent
or on the return of the estate.
Example 2. Assume the same facts as in
Example 1, except that Frank used the accrual
method of accounting. The amount accrued
from the sale of the apples would be included on
his final return. Neither the estate nor the widow
would realize income in respect of a decedent
when the money is later paid.
Example 3. On February 1, George High, a
cash method taxpayer, sold his tractor for
$3,000, payable March 1 of the same year. His
adjusted basis in the tractor was $2,000. Mr.
High died on February 15, before receiving pay-
ment. The gain to be reported as income in
respect of a decedent is the $1,000 difference
between the decedent’s basis in the property
and the sale proceeds. In other words, the in-
come in respect of a decedent is the gain the
decedent would have realized had he lived.
Example 4. Cathy O’Neil was entitled to a
large salary payment at the date of her death.
The amount was to be paid in five annual install-
ments. The estate, after collecting two install-
ments, distributed the right to the remaining
installments to you, the beneficiary. The pay-
ments are income in respect of a decedent.
None of the payments were includible on
Cathy’s final return. The estate must include in
its income the two installments it received, and
you must include in your income each of the
three installments as you receive them.
Example 5. You inherited the right to re-
ceive renewal commissions on life insurance
sold by your father before his death. You inher-
ited the right from your mother, who acquired it
by bequest from your father. Your mother died
before she received all the commissions she
had the right to receive, so you received the rest.
The commissions are income in respect of a
decedent. None of these commissions were in-
cludible in your father’s final return. The com-
missions received by your mother were included
in her income. The commissions you received
are not includible in your mother’s income, even
on her final return. You must include them in
your income.
Character of income. The character of the
income you receive in respect of a decedent is
the same as it would be to the decedent if he or
she were alive. If the income would have been a
P U B L I C AT I O N 5 5 9 181
capital gain to the decedent, it will be a capital
gain to you.
Transfer of right to income. If you transfer
your right to income in respect of a decedent,
you must include in your income the greater of:
• The amount you receive for the right or
• The fair market value of the right you
transfer.
If you make a gift of such a right, you must
include in your income the fair market value of
the right at the time of the gift.
If the right to income from an installment
obligation is transferred, the amount you must
include in income is reduced by the basis of the
obligation. See Installment obligations, later.
Transfer defined. A transfer for this pur-
pose includes a sale, exchange, or other dispo-
sition, the satisfaction of an installment
obligation at other than face value, or the cancel-
lation of an installment obligation.
Installment obligations. If the decedent had
sold property using the installment method and
you collect payments on an installment obliga-
tion you acquired from the decedent, use the
same gross profit percentage the decedent used
to figure the part of each payment that repre-
sents profit. Include in your income the same
profit the decedent would have included had
death not occurred. For more information, see
Publication 537, Installment Sales.
If you dispose of an installment obligation
acquired from a decedent (other than by transfer
to the obligor), the rules explained in Publication
537 for figuring gain or loss on the disposition
apply to you.
Transfer to obligor. A transfer of a right to
income, discussed earlier, has occurred if the
decedent (seller) had sold property using the
installment method and the installment obliga-
tion is transferred to the obligor (buyer or person
legally obligated to pay the installments). A
transfer also occurs if the obligation is canceled
either at death or by the estate or person receiv-
ing the obligation from the decedent. An obliga-
tion that becomes unenforceable is treated as
having been canceled.
If such a transfer occurs, the amount in-
cluded in the income of the transferor (the estate
or beneficiary) is the greater of the amount re-
ceived or the fair market value of the installment
obligation at the time of transfer, reduced by the
basis of the obligation. The basis of the obliga-
tion is the decedent’s basis, adjusted for all
installment payments received after the dece-
dent’s death and before the transfer.
If the decedent and obligor were related per-
sons, the fair market value of the obligation
cannot be less than its face value.
Specific Types of Income
in Respect of a Decedent
This section explains and provides examples of
some specific types of income in respect of a
decedent.
Wages. The entire amount of wages or other
employee compensation earned by the dece-
dent but unpaid at the time of death is income in
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respect of a decedent. The income is not re-
duced by any amounts withheld by the em-
ployer. If the income is $600 or more, the
employer should report it in box 3 of Form
1099-MISC and give the recipient a copy of the
form or a similar statement.
Wages paid as income in respect of a dece-
dent are not subject to federal income tax with-
holding. However, if paid during the calendar
year of death, they are subject to withholding for
social security and Medicare taxes. These taxes
should be included on the decedent’s Form W-2
with the taxes withheld before death. These
wages are not included in box 1 of Form W-2.
Wages paid as income in respect of a dece-
dent after the year of death generally are not
subject to withholding for any federal taxes.
Farm income from crops, crop shares, and
livestock. A farmer’s growing crops and live-
stock at the date of death normally would not
give rise to income in respect of a decedent or
income to be included in the final return. How-
ever, when a cash method farmer receives rent
in the form of crop shares or livestock and owns
the crop shares or livestock at the time of death,
the rent is income in respect of a decedent and
is reported in the year in which the crop shares
or livestock are sold or otherwise disposed of.
The same treatment applies to crop shares or
livestock the decedent had a right to receive as
rent at the time of death for economic activities
that occurred before death.
If the individual died during a rental period,
only the proceeds from the portion of the rental
period ending with death are income in respect
of a decedent. The proceeds from the portion of
the rental period from the day after death to the
end of the rental period are income to the estate.
Cash rent or crop shares and livestock received
as rent and reduced to cash by the decedent are
includible in the final return even though the
rental period did not end until after death.
Example. Alonzo Roberts, who used the
cash method of accounting, leased part of his
farm for a 1-year period beginning March 1. The
rental was one-third of the crop, payable in cash
when the crop share is sold at the direction of
Roberts. Roberts died on June 30 and was alive
during 122 days of the rental period. Seven
months later, Roberts’ personal representative
ordered the crop to be sold and was paid
$1,500. Of the $1,500, 122/365, or $501, is
income in respect of a decedent. The balance of
the $1,500 received by the estate, $999, is in-
come to the estate.
Partnership income. If the partner who died
had been receiving payments representing a
distributive share or guaranteed payment in liq-
uidation of the partner’s interest in a partnership,
the remaining payments made to the estate or
other successor in interest are income in respect
of a decedent. The estate or the successor re-
ceiving the payments must include them in in-
come when received. Similarly, the estate or
other successor in interest receives income in
respect of a decedent if amounts are paid by a
third person in exchange for the successor’s
right to the future payments.
For a discussion of partnership rules, see
Publication 541, Partnerships.
U.S. savings bonds acquired from decedent.
If series EE or series I U.S. savings bonds that
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1041_Prep_Book_10.indb 182
were owned by a cash method individual who
had chosen to report the interest each year (or
by an accrual method individual) are transferred
because of death, the increase in value of the
bonds (interest earned) in the year of death up to
the date of death must be reported on the dece-
dent’s final return. The transferee (estate or ben-
eficiary) reports on its return only the interest
earned after the date of death.
The redemption values of U.S. savings
bonds generally are available from local banks,
credit unions, savings and loan institutions, or
your nearest Federal Reserve Bank.
You also can get information by writing to the
following address.
Bureau of the Public Debt
P.O. Box 1328
Parkersburg, WV 26106-1328
Or, on the Internet, visit:
www.treasurydirect.gov.
If the bonds transferred because of death
were owned by a cash method individual who
had not chosen to report the interest each year
and had purchased the bonds entirely with per-
sonal funds, interest earned before death must
be reported in one of the following ways.
1. The person (executor, administrator, etc.)
who must file the final income tax return of
the decedent can elect to include in it all of
the interest earned on the bonds before
the decedent’s death. The transferee (es-
tate or beneficiary) then includes in its re-
turn only the interest earned after the date
of death.
2. If the election in (1), above, was not made,
the interest earned to the date of death is
income in respect of the decedent and is
not included in the decedent’s final return.
In this case, all of the interest earned
before and after the decedent’s death is
income to the transferee (estate or benefi-
ciary). A transferee who uses the cash
method of accounting and who has not
chosen to report the interest annually may
defer reporting any of it until the bonds are
cashed or the date of maturity, whichever
is earlier. In the year the interest is re-
ported, the transferee may claim a deduc-
tion for any federal estate tax paid that
arose because of the part of interest (if
any) included in the decedent’s estate.
Example 1. Your uncle, a cash method tax-
payer, died and left you a $1,000 series EE
bond. He had bought the bond for $500 and had
not chosen to report the increase in value each
year. At the date of death, interest of $94 had
accrued on the bond, and its value of $594 at
date of death was included in your uncle’s es-
tate. Your uncle’s personal representative did
not choose to include the $94 accrued interest in
the decedent’s final income tax return. You are a
cash method taxpayer and do not choose to
report the increase in value each year as it is
earned. Assuming you cash it when it reaches
maturity value of $1,000, you would report $500
interest income (the difference between maturity
value of $1,000 and the original cost of $500) in
that year. You also are entitled to claim, in that
year, a deduction for any federal estate tax re-
sulting from the inclusion in your uncle’s estate
of the $94 increase in value.
Example 2. If, in Example 1, the personal
representative had chosen to include the $94
interest earned on the bond before death in the
final income tax return of your uncle, you would
report $406 ($500 − $94) as interest when you
cashed the bond at maturity. This $406 repre-
sents the interest earned after your uncle’s
death and was not included in his estate, so no
deduction for federal estate tax is allowable for
this amount.
Example 3. Your uncle died owning series
HH bonds that he acquired in exchange for se-
ries EE bonds. You were the beneficiary on
these bonds. Your uncle used the cash method
of accounting and had not chosen to report the
increase in redemption price of the series EE
bonds each year as it accrued. Your uncle’s
personal representative made no election to in-
clude any interest earned before death in the
decedent’s final return. Your income in respect
of the decedent is the sum of the unreported
increase in value of the series EE bonds, which
constituted part of the amount paid for series HH
bonds, and the interest, if any, payable on the
series HH bonds but not received as of the date
of the decedent’s death.
Specific dollar amount legacy satisfied by
transfer of bonds. If you receive series EE or
series I bonds from an estate in satisfaction of a
specific dollar amount legacy and the decedent
was a cash method taxpayer who did not elect to
report interest each year, only the interest
earned after you receive the bonds is your in-
come. The interest earned to the date of death
plus any further interest earned to the date of
distribution is income to (and reportable by) the
estate.
Cashing U.S. savings bonds. When you
cash a U.S. savings bond that you acquired from
a decedent, the bank or other payer that re-
deems it must give you a Form 1099-INT if the
interest part of the payment you receive is $10 or
more. Your Form 1099-INT should show the
difference between the amount received and the
cost of the bond. The interest shown on your
Form 1099-INT will not be reduced by any inter-
est reported by the decedent before death, or, if
elected, by the personal representative on the
final income tax return of the decedent, or by the
estate on the estate’s income tax return. Your
Form 1099-INT may show more interest than
you must include in your income.
You must make an adjustment on your tax
return to report the correct amount of interest.
Report the total interest shown on Form
1099-INT on your Schedule 1 (Form 1040A) or
Schedule B (Form 1040). Enter a subtotal of the
interest shown on Forms 1099, and the interest
reportable from other sources for which you did
not receive Forms 1099. Show the total interest
that was previously reported and subtract it from
the subtotal. Identify this adjustment as “U.S.
Savings Bond Interest Previously Reported.”
Interest accrued on U.S. Treasury bonds.
The interest accrued on U.S. Treasury bonds
owned by a cash method taxpayer and redeem-
able for the payment of federal estate taxes that
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10/19/2009 10:14:46 AM

was not received as of the date of the individ-
ual’s death is income in respect of a decedent.
This interest is not included in the decedent’s
final income tax return. The estate will treat such
interest as taxable income in the tax year re-
ceived if it chooses to redeem the U.S. Treasury
bonds to pay federal estate taxes. If the person
entitled to the bonds (by bequest, devise, or
inheritance, or because of the death of the indi-
vidual) receives them, that person will treat the
accrued interest as taxable income in the year
the interest is received. Interest that accrues on
the U.S. Treasury bonds after the owner’s death
does not represent income in respect of a dece-
dent. The interest, however, is taxable income
and must be included in the income of the re-
spective recipients.
Interest accrued on savings certificates.
The interest accrued on savings certificates (re-
deemable after death without forfeiture of inter-
est) that is for the period from the date of the last
interest payment and ending with the date of the
decedent’s death, but not received as of that
date, is income in respect of a decedent. Interest
for a period after the decedent’s death that be-
comes payable on the certificates after death is
not income in respect of a decedent, but is
taxable income includible in the income of the
respective recipients.
Inherited IRAs. If a beneficiary receives a
lump-sum distribution from a traditional IRA he
or she inherited, all or some of it may be taxable.
The distribution is taxable in the year received
as income in respect of a decedent up to the
decedent’s taxable balance. This is the dece-
dent’s balance at the time of death, including
unrealized appreciation and income accrued to
date of death, minus any basis (nondeductible
contributions). Amounts distributed that are
more than the decedent’s entire IRA balance
(includes taxable and nontaxable amounts) at
the time of death are the income of the benefi-
ciary.
If the beneficiary of a traditional IRA is the
decedent’s surviving spouse who properly rolls
over the distribution into another traditional IRA,
the distribution is not currently taxed. A surviving
spouse also can roll over tax free the taxable
part of the distribution into a qualified plan, sec-
tion 403 annuity, or section 457 plan.
Example 1. At the time of his death, Greg
owned a traditional IRA. All of the contributions
by Greg to the IRA had been deductible contri-
butions. Greg’s nephew, Mark, was the sole
beneficiary of the IRA. The entire balance of the
IRA, including income accruing before and after
Greg’s death, was distributed to Mark in a lump
sum. Mark must include the total amount re-
ceived in his income. The portion of the
lump-sum distribution that equals the amount of
the balance in the IRA at Greg’s death, including
the income earned before death, is income in
respect of the decedent. Mark may take a de-
duction for any federal estate taxes that were
paid on that portion.
Example 2. Assume the same facts as in
Example 1, except that some of Greg’s contribu-
tions to the IRA had been nondeductible contri-
butions. To determine the amount to include in
income, Mark must subtract the total nondeduct-
ible contributions made by Greg from the total
amount received (including the income that was
Publication 559 (2008)
1041_Prep_Book_10.indb 183
earned in the IRA both before and after Greg’s
death). Income in respect of a decedent is the
total amount included in income less the income
earned after Greg’s death.
For more information on inherited IRAs, see
Publication 590, Individual Retirement Arrange-
ments (IRAs).
Roth IRAs. Qualified distributions from a Roth
IRA are not subject to tax. A distribution made to
a beneficiary or to the Roth IRA owner’s estate
on or after the date of death is a qualified distri-
bution if it is made after the 5-tax-year period
beginning with the first tax year in which a contri-
bution was made to any Roth IRA of the owner.
Generally, the entire interest in the Roth IRA
must be distributed by the end of the fifth calen-
dar year after the year of the owner’s death
unless the interest is payable to a designated
beneficiary over his or her life or life expectancy.
If paid as an annuity, the distributions must be-
gin before the end of the calendar year following
the year of death. If the sole beneficiary is the
decedent’s spouse, the spouse can delay the
distributions until the decedent would have
reached age 701/2 or can treat the Roth IRA as
his or her own Roth IRA.
Part of any distribution to a beneficiary that is
not a qualified distribution may be includible in
the beneficiary’s income. Generally, the part in-
cludible is the earnings in the Roth IRA. Earn-
ings attributable to the period ending with the
decedent’s date of death are income in respect
of a decedent. Additional earnings are the in-
come of the beneficiary.
For more information on Roth IRAs, see
Publication 590.
Coverdell education savings account (ESA).
Generally, the balance in a Coverdell ESA must
be distributed within 30 days after the individual
for whom the account was established reaches
age 30 or dies, whichever is earlier. The treat-
ment of the Coverdell ESA at the death of an
individual under age 30 depends on who ac-
quires the interest in the account. If the dece-
dent’s estate acquires the interest, see the
discussion under Final Return for Decedent,
earlier.
The age 30 limitation does not apply if
!
CAUTION
the individual for whom the account
was established or the beneficiary that
acquires the account is an individual with special
needs. This includes an individual who, because
of a physical, mental, or emotional condition
(including a learning disability), requires addi-
tional time to complete his or her education.
If the decedent’s spouse or other family
member is the designated beneficiary of the
decedent’s account, the Coverdell ESA be-
comes that person’s Coverdell ESA. It is subject
to the rules discussed in Publication 970.
Any other beneficiary (including a spouse or
family member who is not the designated benefi-
ciary) must include in income the earnings por-
tion of the distribution. Any balance remaining at
the close of the 30-day period is deemed to be
distributed at that time. The amount included in
income is reduced by any qualified education
expenses of the decedent that are paid by the
beneficiary within 1 year after the decedent’s
date of death. An estate tax deduction, dis-
cussed later, applies to the amount included in
income by a beneficiary other than the dece-
dent’s spouse or family member.
P U B L I C AT I O N 5 5 9 183
HSA, Archer MSA, or a Medicare Advantage
MSA. The treatment of an HSA, Archer MSA,
or a Medicare Advantage MSA, at the death of
the account holder depends on who acquires
the interest in the account. If the decedent’s
estate acquired the interest, see the discussion
under Final Return for Decedent, earlier.
If the decedent’s spouse is the designated
beneficiary of the account, the account becomes
that spouse’s Archer MSA. It is subject to the
rules discussed in Publication 969.
Any other beneficiary (including a spouse
that is not the designated beneficiary) must in-
clude in income the fair market value of the
assets in the account on the decedent’s date of
death. This amount must be reported for the
beneficiary’s tax year that includes the dece-
dent’s date of death. The amount included in
income is reduced by any qualified medical ex-
penses for the decedent that are paid by the
beneficiary within 1 year after the decedent’s
date of death. An estate tax deduction, dis-
cussed later, applies to the amount included in
income by a beneficiary other than the dece-
dent’s spouse.
Deductions in Respect
of a Decedent
Items such as business expenses, in-
come-producing expenses, interest, and taxes,
for which the decedent was liable but that are
not properly allowable as deductions on the de-
cedent’s final income tax return will be allowed
as a deduction to one of the following when paid:
• The estate or
• The person who acquired an interest in
the decedent’s property (subject to such
obligations) because of the decedent’s
death, if the estate was not liable for the
obligation.
Similar treatment is given to the foreign tax
credit. A beneficiary who must pay a foreign tax
on income in respect of a decedent will be enti-
tled to claim the foreign tax credit.
Depletion. The deduction for percentage de-
pletion is allowable only to the person (estate or
beneficiary) who receives income in respect of a
decedent to which the deduction relates,
whether or not that person receives the property
from which the income is derived. An heir who
(because of the decedent’s death) receives in-
come as a result of the sale of units of mineral by
the decedent (who used the cash method) will
be entitled to the depletion allowance for that
income. If the decedent had not figured the de-
duction on the basis of percentage depletion,
any depletion deduction to which the decedent
was entitled at the time of death would be allow-
able on the decedent’s final return, and no de-
pletion deduction in respect of a decedent would
be allowed to anyone else.
For more information about depletion, see
chapter 9 in Publication 535, Business Ex-
penses.
Estate Tax Deduction
Income that a decedent had a right to receive is
included in the decedent’s gross estate and is
subject to estate tax. This income in respect of a
decedent is also taxed when received by the
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 184 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
recipient (estate or beneficiary). However, an
income tax deduction is allowed to the recipient
for the estate tax paid on the income.
The deduction for estate tax can be claimed
only for the same tax year in which the income in
respect of a decedent must be included in the
recipient’s income. (This also is true for income
in respect of a prior decedent.)
Individuals can claim this deduction only as
an itemized deduction on line 28 of Schedule A
(Form 1040). This deduction is not subject to the
2% limit on miscellaneous itemized deductions.
Estates can claim the deduction on the line pro-
vided for the deduction on Form 1041. For the
alternative minimum tax computation, the de-
duction is not included in the itemized deduc-
tions that are an adjustment to taxable income.
If income in respect of a decedent is capital
gain income, you must reduce the gain, but not
below zero, by any deduction for estate tax paid
on such gain. This applies in figuring the follow-
ing:
• The maximum tax on net capital gain (in-
cluding qualified dividends),
• The 50% exclusion for gain on small busi-
ness stock, and
• The limitation on capital losses.
Computation
To figure a recipient’s estate tax deduction, de-
termine:
• The estate tax that qualifies for the deduc-
tion and
• The recipient’s part of the deductible tax.
Deductible estate tax. The estate tax is the
tax on the taxable estate, reduced by any credits
allowed. The estate tax qualifying for the deduc-
tion is the part of the net value of all the items in
the estate that represents income in respect of a
decedent. Net value is the excess of the items of
income in respect of a decedent over the items
of expenses in respect of a decedent. The de-
ductible estate tax is the difference between the
actual estate tax and the estate tax determined
without including net value.
Example 1. Jack Sage used the cash
method of accounting. At the time of his death,
he was entitled to receive $12,000 from clients
for his services and he had accrued bond inter-
est of $8,000, for a total income in respect of a
decedent of $20,000. He also owed $5,000 for
business expenses for which his estate is liable.
The income and expenses are reported on
Jack’s estate tax return.
The tax on Jack’s estate is $9,460 after cred-
its. The net value of the items included as in-
come in respect of the decedent is $15,000
($20,000 − $5,000). The estate tax determined
without including the $15,000 in the taxable es-
tate is $4,840, after credits. The estate tax that
qualifies for the deduction is $4,620 ($9,460 −
$4,840).
Recipient’s deductible part. Figure the re-
cipient’s part of the deductible estate tax by
dividing the estate tax value of the items of
income in respect of a decedent included in the
recipient’s income (the numerator) by the total
value of all items included in the estate that
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1041_Prep_Book_10.indb 184
represents income in respect of a decedent (the
denominator). If the amount included in the re-
cipient’s income is less than the estate tax value
of the item, use the lesser amount in the numer-
ator.
Example 2. As the beneficiary of Jack’s es-
tate (Example 1), you collect the $12,000 ac-
counts receivable from his clients. You will
include the $12,000 in your income in the tax
year you receive it. If you itemize your deduc-
tions in that tax year, you can claim an estate tax
deduction of $2,772 figured as follows:
Value included in your
income Estate tax
X Life insurance proceeds. Life insurance pro-
Total value of income in qualifying for
respect of decedent deduction
$12,000
X $4,620 = $2,772
$20,000
If the amount you collected for the accounts
receivable was more than $12,000, you would
still claim $2,772 as an estate tax deduction
because only the $12,000 actually reported on
the estate tax return can be used in the above
computation. However, if you collected less than
the $12,000 reported on the estate tax return,
use the smaller amount to figure the estate tax
deduction.
Estates. The estate tax deduction allowed an
estate is figured in the same manner as just
discussed. However, any income in respect of a
decedent received by the estate during the tax
year is reduced by any such income that is
properly paid, credited, or required to be distrib-
uted by the estate to a beneficiary. The benefi-
ciary would include such distributed income in
respect of a decedent for figuring the benefi-
ciary’s deduction.
Surviving annuitants. For the estate tax de-
duction, an annuity received by a surviving an-
nuitant under a joint and survivor annuity
contract is considered income in respect of a
decedent. The deceased annuitant must have
died after the annuity starting date. You must
make a special computation to figure the estate
tax deduction for the surviving annuitant. See
Regulations section 1.691(d)-1.
Gifts, Insurance,
and Inheritances
Property received as a gift, bequest, or inheri-
tance is not included in your income. However, if
property you receive in this manner later pro-
duces income, such as interest, dividends, or
rents, that income is taxable to you. The income
from property donated to a trust that is paid,
credited, or distributed to you is taxable income
to you. If the gift, bequest, or inheritance is the
income from property, that income is taxable to
you.
If you receive property from a decedent’s
estate in satisfaction of your right to the income
of the estate, it is treated as a bequest or inheri-
tance of income from property. See Distributions
to Beneficiaries From an Estate, later.
Insurance
The proceeds from a decedent’s life insurance
policy paid by reason of his or her death gener-
ally are excluded from income. The exclusion
applies to any beneficiary, whether a family
member or other individual, a corporation, or a
partnership.
Veterans’ insurance proceeds. Veterans’ in-
surance proceeds and dividends are not taxable
either to the veteran or to the beneficiaries.
Interest on dividends left on deposit with the
Department of Veterans Affairs is not taxable.
ceeds paid to you because of the death of the
insured (or because the insured is a member of
the U.S. uniformed services who is missing in
action) are not taxable unless the policy was
turned over to you for a price. This is true even if
the proceeds are paid under an accident or
health insurance policy or an endowment con-
tract. If the proceeds are received in install-
ments, see the discussion under Insurance
received in installments, later.
Accelerated death benefits. You can ex-
clude from income accelerated death benefits
you receive on the life of an insured individual if
certain requirements are met. Accelerated
death benefits are amounts received under a life
insurance contract before the death of the in-
sured. These benefits also include amounts re-
ceived on the sale or assignment of the contract
to a viatical settlement provider. This exclusion
applies only if the insured was a terminally ill
individual or a chronically ill individual. This ex-
clusion does not apply if the insured is a director,
officer, employee, or has a financial interest, in
any trade or business carried on by you.
Terminally ill individual. A terminally ill in-
dividual is one who has been certified by a
physician as having an illness or physical condi-
tion that reasonably can be expected to result in
death in 24 months or less from the date of
certification.
Chronically ill individual. A chronically ill
individual is one who has been certified as one
of the following:
• An individual who, for at least 90 days, is
unable to perform at least two activities of
daily living without substantial assistance
due to a loss of functional capacity, or
• An individual who requires substantial su-
pervision to be protected from threats to
health and safety due to severe cognitive
impairment.
A certification must have been made by a
licensed health care practitioner within the previ-
ous 12 months.
Exclusion limited. If the insured was a
chronically ill individual, your exclusion of accel-
erated death benefits is limited to the cost you
incurred in providing qualified long-term care
services for the insured. In determining the cost
incurred, do not include amounts paid or reim-
bursed by insurance or otherwise. Subject to
certain limits, you can exclude payments re-
ceived on a periodic basis without regard to your
costs.
Publication 559 (2008)
10/19/2009 10:14:48 AM

Interest option on insurance. If an insurance
company pays you interest only on proceeds
from life insurance left on deposit, the interest
you are paid is taxable.
Insurance received in installments. If you
receive life insurance proceeds in installments,
you can exclude part of each installment from
your income.
To determine the part excluded, divide the
amount held by the insurance company (gener-
ally the total lump sum payable at the death of
the insured person) by the number of install-
ments to be paid. Include anything over this
excluded part in your income as interest.
Specified number of installments. If you
will receive a specified number of installments
under the insurance contract, figure the part of
each installment you can exclude by dividing the
amount held by the insurance company by the
number of installments to which you are entitled.
A secondary beneficiary, in case you die before
you receive all of the installments, is entitled to
the same exclusion.
Example. As beneficiary, you choose to re-
ceive $40,000 of life insurance proceeds in 10
annual installments of $6,000. Each year, you
can exclude from your income $4,000 ($40,000
÷ 10) as a return of principal. The balance of the
installment, $2,000, is taxable as interest in-
come.
Specified amount payable. If each install-
ment you receive under the insurance contract
is a specific amount based on a guaranteed rate
of interest, but the number of installments you
will receive is uncertain, the part of each install-
ment that you can exclude from income is the
amount held by the insurance company divided
by the number of installments necessary to use
up the principal and guaranteed interest in the
contract.
Example. The face amount of the policy is
$200,000, and as beneficiary you choose to
receive annual installments of $12,000. The in-
surer’s settlement option guarantees you this
amount for 20 years based on a guaranteed rate
of interest. It also provides that extra interest
may be credited to the principal balance accord-
ing to the insurer’s earnings. The excludable
part of each guaranteed installment is $10,000
($200,000 ÷ 20 years). The balance of each
guaranteed installment, $2,000, is interest in-
come to you. The full amount of any additional
payment for interest is income to you.
Installments for life. If, as the beneficiary
under an insurance contract, you are entitled to
receive the proceeds in installments for the rest
of your life without a refund or period-certain
guarantee, you figure the excluded part of each
installment by dividing the amount held by the
insurance company by your life expectancy. If
there is a refund or period-certain guarantee, the
amount held by the insurance company for this
purpose is reduced by the actuarial value of the
guarantee.
Example. As beneficiary, you choose to re-
ceive the $50,000 proceeds from a life insur-
ance contract under a life-income-with-
cash-refund option. You are guaranteed $2,700
a year for the rest of your life (which is estimated
by use of mortality tables to be 25 years from the
Publication 559 (2008)
1041_Prep_Book_10.indb 185
insured’s death). The actuarial value of the re-
fund feature is $9,000. The amount held by the
insurance company, reduced by the value of the
guarantee, is $41,000 ($50,000 − $9,000) and
the excludable part of each installment repre-
senting a return of principal is $1,640 ($41,000 ÷
25). The remaining $1,060 ($2,700 − $1,640) is
interest income to you. If you should die before
receiving the entire $50,000, the refund payable
to the refund beneficiary is not taxable.
Flexible premium contracts. A life insurance
contract (including any qualified additional ben-
efits) is a flexible premium life insurance con-
tract if it provides for the payment of one or more
premiums that are not fixed by the insurer as to
both timing and amount. For a flexible premium
contract issued before January 1, 1985, the pro-
ceeds paid under the contract because of the
death of the insured will be excluded from the
recipient’s income only if the contract meets the
requirements explained under section 101(f) of
the Internal Revenue Code.
Basis of Inherited Property
Your basis in property you inherit from a dece-
dent is generally one of the following:
• The FMV of the property at the date of the
individual’s death;
• The FMV on the alternate valuation date
(discussed in the instructions for Form
706), if so elected by the personal repre-
sentative for the estate;
• The value under the special-use valuation
method for real property used in farming
or other closely held business (see Spe-
cial-use valuation, later), if so elected by
the personal representative; or
• The decedent’s adjusted basis in land to
the extent of the value excluded from the
decedent’s taxable estate as a qualified
conservation easement (discussed in the
instructions for Form 706).
Exception for appreciated property. If you
or your spouse gave appreciated property to an
individual during the 1-year period ending on the
date of that individual’s death and you (or your
spouse) later acquired the same property from
the decedent, your basis in the property is the
same as the decedent’s adjusted basis immedi-
ately before death.
Appreciated property. Appreciated prop-
erty is property that had an FMV greater than its
adjusted basis on the day it was transferred to
the decedent.
Special-use valuation. If you are a qualified
heir and you receive a farm or other closely held
business real property from the estate for which
the personal representative elected special-use
valuation, the property is valued on the basis of
its actual use rather than its FMV.
If you are a qualified heir and you buy spe-
cial-use valuation property from the estate, your
basis is the estate’s basis (determined under the
special-use valuation method) immediately
before your purchase increased by any gain
recognized by the estate.
You are a qualified heir if you are an ancestor
(parent, grandparent, etc.), the spouse, or a
P U B L I C AT I O N 5 5 9 185
lineal descendant (child, grandchild, etc.) of the
decedent, a lineal descendant of the decedent’s
parent or spouse, or the spouse of any of these
lineal descendants.
For more information on special-use valua-
tion, see Form 706.
Increased basis for special-use valuation
property. Under certain conditions, some or
all of the estate tax benefits obtained by using
the special-use valuation will be subject to re-
capture. Generally, an additional estate tax must
be paid by the qualified heir if the property is
disposed of, or is no longer used for a qualifying
purpose within 10 years of the decedent’s death.
If you must pay any additional estate (recap-
ture) tax, you can elect to increase your basis in
the special-use valuation property to its FMV on
the date of the decedent’s death (or on the
alternate valuation date, if it was elected by the
personal representative). If you elect to increase
your basis, you must pay interest on the recap-
ture tax for the period from the date 9 months
after the decedent’s death until the date you pay
the recapture tax.
For more information on the recapture tax,
see Instructions for Form 706-A.
S corporation stock. The basis of inherited S
corporation stock must be reduced if there is
income in respect of a decedent attributable to
that stock.
Joint interest. Figure the surviving tenant’s
new basis of property that was jointly owned
(joint tenancy or tenancy by the entirety) by
adding the surviving tenant’s original basis in the
property to the value of the part of the property
(one of the values described earlier) included in
the decedent’s estate. Subtract from the sum
any deductions for wear and tear, such as de-
preciation or depletion, allowed to the surviving
tenant on that property.
Example. Fred and Anne Maple (brother
and sister) owned, as joint tenants with right of
survivorship, rental property they purchased for
$60,000. Anne paid $15,000 of the purchase
price and Fred paid $45,000. Under local law,
each had a half interest in the income from the
property. When Fred died, the FMV of the prop-
erty was $100,000. Depreciation deductions al-
lowed before Fred’s death were $20,000.
Anne’s basis in the property is $80,000 figured
as follows:
Anne’s original basis . . . . . . $15,000
Interest acquired from Fred (3/4
75,000 $90,000
of $100,000) . . . . . . . . . . .
Minus: 1/2 of $20,000 depreciation . . . . 10,000
Anne’s basis . . . . . . . . . . . . . . . . $80,000
Qualified joint interest. One-half of the
value of property owned by a decedent and
spouse as tenants by the entirety, or as joint
tenants with right of survivorship if the decedent
and spouse are the only joint tenants, is included
in the decedent’s gross estate. This is true re-
gardless of how much each contributed toward
the purchase price.
Figure the basis for a surviving spouse by
adding one-half of the property’s cost basis to
the value included in the gross estate. Subtract
from this sum any deductions for wear and tear,
such as depreciation or depletion, allowed on
that property to the surviving spouse.
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 186 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
Example. Dan and Diane Gilbert owned, as
tenants by the entirety, rental property they pur-
chased for $60,000. Dan paid $15,000 of the
purchase price and Diane paid $45,000. Under
local law, each had a half interest in the income
from the property. When Diane died, the FMV of
the property was $100,000. Depreciation deduc-
tions allowed before Diane’s death were
$20,000. Dan’s basis in the property is $70,000
figured as follows:
One-half of cost basis (1/2 of
$30,000
$60,000) . . . . . . . . . . . . .
Interest acquired from Diane
50,000 $80,000
(1/2 of $100,000) . . . . . . . . .
Minus: 1/2 of $20,000 depreciation . . . . 10,000
Dan’s basis . . . . . . . . . . . . . . . . . $70,000
More information. See Publication 551, Ba-
sis of Assets, for more information on basis. If
you and your spouse lived in a community prop-
erty state, see the discussion in that publication
about figuring the basis of your community prop-
erty after your spouse’s death.
Depreciation. If you can depreciate property
you inherited, you generally must use the modi-
fied accelerated cost recovery system (MACRS)
to determine depreciation.
For joint interests and qualified joint inter-
ests, you must make the following computations
to figure depreciation.
• The first computation is for your original
basis in the property.
• The second computation is for the inher-
ited part of the property.
Continue depreciating your original basis under
the same method you had used in previous
years. Depreciate the inherited part using
MACRS.
MACRS consists of two depreciation sys-
tems, the General Depreciation System (GDS)
and the Alternative Depreciation System (ADS).
For more information on MACRS, see Publica-
tion 946, How To Depreciate Property.
Valuation misstatements. If the value or ad-
justed basis of any property claimed on an in-
come tax return is 150% or more of the amount
determined to be the correct amount, there is a
substantial valuation misstatement. If the value
or adjusted basis is 200% or more of the amount
determined to be the correct amount, there is a
gross valuation misstatement.
Understatements. A substantial estate or
gift tax valuation misstatement occurs when the
value of property reported is 65% or less of the
actual value of the property. A gross valuation
misstatement occurs if any property on a return
is valued at 40% or less of the value determined
to be correct.
Penalty. If a misstatement results in an un-
derpayment of tax of more than $5,000, an addi-
tion to tax of 20% of the underpayment can
apply. The penalty increases to 40% if the value
or adjusted basis reported is a gross valuation
misstatement.
The IRS may waive all or part of the 20%
addition to tax (for substantial valuation over-
statement) if the following apply:
• The claimed value of the property was
based on a qualified appraisal made by a
qualified appraiser and
Page 14
1041_Prep_Book_10.indb 186
• In addition to obtaining such appraisal, the
taxpayer made a good faith investigation
of the value of the contributed property.
No waiver is available for the 40% addition to
tax (for gross valuation overstatement).
For transitional guidance on the definitions of
“qualified appraisal” and “qualified appraiser,”
see Notice 2006-96, 2006-46 I.R.B. 902, avail-
able at www.irs.gov/irb/2006-46_IRB/ar13.html.
The definitions apply to appraisals prepared
for:
• Donated property for which a deduction of
more than $5,000 is claimed and
• Returns filed after August 17, 2006.
Holding period. If you sell or dispose of inher-
ited property that is a capital asset, you have a
long-term gain or loss from property held for
more than 1 year, regardless of how long you
held the property.
Property distributed in kind. Your basis in
property distributed in kind by a decedent’s es-
tate is the same as the estate’s basis immedi-
ately before the distribution plus any gain, or
minus any loss, recognized by the estate. Prop-
erty is distributed in kind if it satisfies your right to
receive another property or amount, such as the
income of the estate or a specific dollar amount.
Property distributed in kind generally includes
any noncash property you receive from the es-
tate other than the following:
• A specific bequest (unless it must be dis-
tributed in more than three installments);
or
• Real property, the title to which passes
directly to you under local law.
For information on an estate’s recognized gain
or loss on distributions in kind, see Income To
Include under Income Tax Return of an Es-
tate — Form 1041, later.
Other Items of Income
Some other items of income that you, as a survi-
vor or beneficiary, may receive are discussed
below. Lump-sum payments you receive as the
surviving spouse or beneficiary of a deceased
employee may represent:
• Accrued salary payments;
• Distributions from employee profit-sharing,
pension, annuity, and stock bonus plans;
or
• Other items that should be treated sepa-
rately for tax purposes.
The treatment of these lump-sum payments de-
pends on what the payments represent.
If the decedent is a specified terrorist
!
CAUTION
victim (see Specified Terrorist Victim,
earlier), certain income received by the
beneficiary or the estate is not taxable. For more
information, see Publication 3920.
Public safety officers. Special rules apply to
certain amounts received because of the death
of a public safety officer (law enforcement of-
ficers, fire fighters, chaplains, ambulance crews,
and rescue squads).
The provisions for public safety officers
!
CAUTION
apply to a chaplain killed in the line of
duty after September 10, 2001, if the
chaplain was responding to a fire, rescue, or
police emergency as a member or employee of
a fire or police department.
Death benefits. The death benefit payable
to eligible survivors of public safety officers who
die as a result of traumatic injuries sustained in
the line of duty is not included in either the
beneficiaries’ income or the decedent’s gross
estate. The benefit is administered through the
Bureau of Justice Assistance (BJA).
The BJA can pay the eligible survivors an
emergency interim benefit up to $3,000 if it de-
termines that a public safety officer’s death is
one for which a death benefit will probably be
paid. If there is no final payment, the recipient of
the interim benefit is liable for repayment. How-
ever, the BJA may waive all or part of the repay-
ment if it will cause a hardship. If all or part of the
repayment is waived, that amount is not in-
cluded in income.
Survivor benefits. Generally, a survivor
annuity received by the spouse, former spouse,
or child of a public safety officer killed in the line
of duty is excluded from the recipient’s income.
The annuity must be provided under a govern-
ment plan and is excludable to the extent that it
is attributable to the officer’s service as a public
safety officer.
The exclusion does not apply if the recipi-
ent’s actions were responsible for the officer’s
death. It also does not apply in the following
circumstances.
• The death was caused by the intentional
misconduct of the officer or by the officer’s
intention to cause such death.
• The officer was voluntarily intoxicated at
the time of death.
• The officer was performing his or her du-
ties in a grossly negligent manner at the
time of death.
Salary or wages. Salary or wages paid after
the employee’s death are usually taxable in-
come to the beneficiary. See Wages, earlier,
under Specific Types of Income in Respect of a
Decedent.
Rollover distributions. An employee’s sur-
viving spouse who receives an eligible rollover
distribution may roll it over tax free into an IRA, a
qualified plan, a section 403 annuity, or a section
457 plan. For more information, see Publication
575, Pension and Annuity Income, and Form
4972, Tax on Lump-Sum Distributions.
Rollovers by nonspouse beneficiary. A
beneficiary other than the employee’s surviving
spouse may be able to roll over all or part of a
distribution from an eligible retirement plan of a
deceased employee. The nonspouse benefi-
ciary must be the designated beneficiary of the
employee. The distribution must be a direct trus-
tee-to-trustee transfer to your IRA that was set
up to receive the distribution. The transfer will be
treated as an eligible rollover distribution and the
receiving plan will be treated as an inherited
IRA. For more information on inherited IRAs,
see Publication 590.
Publication 559 (2008)
10/19/2009 10:14:51 AM

Pensions and annuities. For beneficiaries
who receive pensions and annuities, see Publi-
cation 575. For beneficiaries of federal civil serv-
ice employees or retirees, see Publication 721,
Tax Guide to U.S. Civil Service Retirement Ben-
efits.
Inherited IRAs. If a person other than the de-
cedent’s spouse inherits the decedent’s tradi-
tional IRA or Roth IRA, that person cannot treat
the IRA as one established on his or her behalf.
If a distribution from a traditional IRA is from
contributions that were deducted or from earn-
ings and gains in the IRA, it is fully taxable
income. If there were nondeductible contribu-
tions, an allocation between taxable and nontax-
able income must be made. For information on
distributions from a Roth IRA, see the discus-
sion earlier under Income in Respect of a Dece-
dent. The inherited IRA cannot be rolled over
into, or receive a rollover from, another IRA. No
deduction is allowed for amounts paid into that
inherited IRA. For more information about IRAs,
see Publication 590.
Estate income. Estates may have to pay fed-
eral income tax. Beneficiaries may have to pay
tax on their share of estate income. However,
there is never a double tax. See Distributions to
Beneficiaries From an Estate, later.
Income Tax Return
of an Estate—
Form 1041
An estate is a taxable entity separate from the
decedent and comes into being with the death of
the individual. It exists until the final distribution
of its assets to the heirs and other beneficiaries.
The income earned by the assets during this
period must be reported by the estate under the
conditions described in this publication. The tax
generally is figured in the same manner and on
the same basis as for individuals, with certain
differences in the computation of deductions
and credits, as explained later.
The estate’s income, like an individual’s in-
come, must be reported annually on either a
calendar or fiscal year basis. As the personal
representative, you choose the estate’s ac-
counting period when you file its first Form 1041.
The estate’s first tax year can be any period that
ends on the last day of a month and does not
exceed 12 months.
Once you choose the tax year, you generally
cannot change it without IRS approval. Also, on
the first income tax return, you must choose the
accounting method (cash, accrual, or other) you
will use to report the estate’s income. Once you
have used a method, you ordinarily cannot
change it without IRS approval. For a more com-
plete discussion of accounting periods and
methods, see Publication 538.
Filing Requirements
Every domestic estate with gross income of
$600 or more during a tax year must file a Form
1041. If one or more of the beneficiaries of the
domestic estate are nonresident alien individu-
als, the personal representative must file Form
Publication 559 (2008)
1041_Prep_Book_10.indb 187
1041, even if the gross income of the estate is
less than $600.
A fiduciary for a nonresident alien estate with
U.S. source income, including any income that
is effectively connected with the conduct of a
trade or business in the United States, must file
Form 1040NR, U.S. Nonresident Alien Income
Tax Return, as the income tax return of the
estate.
A nonresident alien who was a resident of
Puerto Rico, Guam, American Samoa, or the
Commonwealth of the Northern Mariana Islands
for the entire tax year will, for this purpose, be
treated as a resident alien of the United States.
Schedule K-1 (Form 1041)
As personal representative, you must file a sep-
arate Schedule K-1 (Form 1041), or an accept-
able substitute (described below), for each
beneficiary. File these schedules with Form
1041.
You must show each beneficiary’s taxpayer
identification number. A $50 penalty is charged
for each failure to provide the identifying number
of each beneficiary unless reasonable cause is
established for not providing it. When you as-
sume your duties as the personal representa-
tive, you must ask each beneficiary to give you a
taxpayer identification number (TIN). A nonresi-
dent alien beneficiary that gives you a withhold-
ing certificate generally must provide you with a
TIN (see Publication 515). A TIN is not required
for an executor or administrator of the estate
unless that person is also a beneficiary.
As personal representative, you must also
furnish a Schedule K-1 (Form 1041), or a substi-
tute, to the beneficiary by the date on which the
Form 1041 is filed. Failure to provide this payee
statement can result in a penalty of $50 for each
failure. This penalty also applies if you omit
information or include incorrect information on
the payee statement.
You do not need prior approval for a substi-
tute Schedule K-1 (Form 1041) that is an exact
copy of the official schedule or that follows the
specifications in Publication 1167, General
Rules and Specifications for Substitute Forms
and Schedules. You must have prior approval
for any other substitute Schedule K-1 (Form
1041).
Beneficiaries. The personal representative
has a fiduciary responsibility to the ultimate re-
cipients of the income and the property of the
estate. While the courts use a number of names
to designate specific types of beneficiaries or
the recipients of various types of property, it is
sufficient in this publication to call all of them
beneficiaries.
Liability of the beneficiary. The income
tax liability of an estate attaches to the assets of
the estate. If the income is distributed or must be
distributed during the current tax year, the in-
come is reportable by each beneficiary on his or
her individual income tax return. If the income
does not have to be distributed, and is not dis-
tributed but is retained by the estate, the income
tax on the income is payable by the estate. If the
income is distributed later without the payment
of the taxes due, the beneficiary can be liable for
tax due and unpaid to the extent of the value of
the estate assets received.
P U B L I C AT I O N 5 5 9 187
Income of the estate is taxed to either the
estate or the beneficiary, but not to both.
Nonresident alien beneficiary. As a resi-
dent or domestic fiduciary, in addition to filing
Form 1041, you may have to file the income tax
return (Form 1040NR) and pay the tax for a
nonresident alien beneficiary. Depending upon
a number of factors, you may or may not have to
file Form 1040NR for that beneficiary. For infor-
mation on who must file Form 1040NR, see
Publication 519, U.S. Tax Guide for Aliens.
You do not have to file the nonresident
alien’s return and pay the tax if that beneficiary
has appointed an agent in the United States to
file a federal income tax return. However, you
must attach to the estate’s return (Form 1041) a
copy of the document that appoints the benefi-
ciary’s agent.
You also must file Form 1042, Annual With-
holding Tax Return for U.S. Source Income of
Foreign Persons, and Form 1042-S, Foreign
Person’s U.S. Source Income Subject to With-
holding, to report and transmit withheld tax on
distributable net income (discussed later) actu-
ally distributed. This applies to the extent the
distribution consists of an amount subject to
withholding. For more information, see Publica-
tion 515.
Amended Return
If you have to file an amended Form 1041, use a
copy of the form for the appropriate year and
check the Amended return box. Complete the
entire return, correct the appropriate lines with
the new information, and refigure the tax liability.
On an attached sheet, explain the reason for the
changes and identify the lines and amounts
changed.
If the amended return results in a change to
income, or a change in distribution of any in-
come or other information provided to a benefi-
ciary, you must file an amended Schedule K-1
(Form 1041) and give a copy to each benefi-
ciary. Check the “Amended K-1” box at the top of
Schedule K-1.
Information Returns
Even though you may not have to file an income
tax return for the estate, you may have to file
Form 1099-DIV, Form 1099-INT, or Form
1099-MISC if you receive the income as a nomi-
nee or middleman for another person. For more
information on filing information returns, see the
General Instructions for Forms 1099, 1098,
5498, and W-2G.
You will not have to file information returns
for the estate if the estate is the owner of record
and you file an income tax return for the estate
on Form 1041 giving the name, address, and
identifying number of each actual owner and
furnish a completed Schedule K-1 (Form 1041)
to each actual owner.
Penalty. A penalty of up to $50 can be
charged for each failure to file or failure to in-
clude correct information on an information re-
turn. (Failure to include correct information
includes failure to include all the information
required.) If it is shown that such failure is due to
intentional disregard of the filing requirement,
the penalty amount increases.
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 188 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
See the General Instructions for Forms
1099, 1098, 5498, and W-2G, for more informa-
tion.
Copy of the Will
You do not have to file a copy of the decedent’s
will unless requested by the IRS. If requested,
you must attach a statement to it indicating the
provisions that, in your opinion, determine how
much of the estate’s income is taxable to the
estate or to the beneficiaries. You should also
attach a statement signed by you under penal-
ties of perjury that the will is a true and complete
copy.
Income To Include
The estate’s taxable income generally is figured
the same way as an individual’s income, except
as explained in the following discussions.
If the decedent is a specified terrorist
!
CAUTION
victim (see Specified Terrorist Victim
earlier), certain income received by the
estate is not taxable. See Publication 3920.
Gross income of an estate consists of all
items of income received or accrued during the
tax year. It includes dividends, interest, rents,
royalties, gain from the sale of property, and
income from business, partnerships, trusts, and
any other sources. For a discussion of income
from dividends, interest, and other investment
income as well as gains and losses from the sale
of investment property, see Publication 550. For
a discussion of gains and losses from the sale of
other property, including business property, see
Publication 544, Sales and Other Dispositions of
Assets.
If, as the personal representative, your du-
ties include the operation of the decedent’s busi-
ness, see Publication 334. That publication
provides general information about the tax laws
that apply to a sole proprietorship.
Income in respect of a decedent. As the
personal representative of the estate, you may
receive income that the decedent would have
reported had death not occurred. For an expla-
nation of this income, see Income in Respect of
a Decedent under Other Tax Information, ear-
lier. An estate may qualify to claim a deduction
for estate taxes if the estate must include in
gross income for any tax year an amount of
income in respect of a decedent. See Estate Tax
Deduction, earlier, under Other Tax Information.
Gain (or loss) from sale of property. During
the administration of the estate, you may find it
necessary or desirable to sell all or part of the
estate’s assets to pay debts and expenses of
administration, or to make proper distributions of
the assets to the beneficiaries. While you may
have the legal authority to dispose of the prop-
erty, title to it may be vested (given a legal
interest in the property) in one or more of the
beneficiaries. This is usually true of real prop-
erty. To determine whether any gain or loss
must be reported by the estate or by the benefi-
ciaries, consult local law to determine the legal
owner.
Redemption of stock to pay death taxes.
Under certain conditions, a distribution to a
shareholder (including the estate) in redemption
of stock that was included in the decedent’s
Page 16
1041_Prep_Book_10.indb 188
gross estate may be allowed capital gain (or
loss) treatment.
Character of asset. The character of an
asset in the hands of an estate determines
whether gain or loss on its sale or other disposi-
tion is capital or ordinary. The asset’s character
depends on how the estate holds or uses it. If it
was a capital asset to the decedent, it generally
will be a capital asset to the estate. If it was land
or depreciable property used in the decedent’s
business and the estate continues the business,
it generally will have the same character to the
estate that it had in the decedent’s hands. If it
was held by the decedent for sale to customers,
it generally will be considered to be held for sale
to customers by the estate if the decedent’s
business continues to operate during the admin-
istration of the estate.
The gain from a sale of depreciable
!
CAUTION
property between an estate and a ben-
eficiary of that estate will be treated as
ordinary income, unless the sale or exchange
was made to satisfy a pecuniary bequest.
Sale of decedent’s residence. If the estate
is the legal owner of a decedent’s residence and
the personal representative sells it in the course
of administration, the tax treatment of gain or
loss depends on how the estate holds or uses
the former residence. For example, if, as the
personal representative, you intend to realize
the value of the house through sale, the resi-
dence is a capital asset held for investment and
gain or loss is capital gain or loss (which may be
deductible). This is the case even though it was
the decedent’s personal residence and even if
you did not rent it out. If, however, the house is
not held for business or investment use (for
example, if you intend to permit a beneficiary to
live in the residence rent-free and then distribute
it to the beneficiary to live in), and you later
decide to sell the residence without first con-
verting it to business or investment use, any gain
is capital gain, but a loss is not deductible.
Holding period. An estate (or other recipi-
ent) that acquires property from a decedent and
sells or otherwise disposes of it is considered to
have held that property for more than 1 year, no
matter how long the estate and the decedent
actually held the property.
Basis of property. The basis used to figure
gain or loss for property the estate receives from
the decedent usually is its fair market value at
the date of death. See Basis of Inherited Prop-
erty under Other Tax Information, earlier, for
other basis in inherited property.
If the estate purchases property after the
decedent’s death, the basis generally will be its
cost.
The basis of certain appreciated property the
estate receives from the decedent will be the
decedent’s adjusted basis in the property imme-
diately before death. This applies if the property
was acquired by the decedent as a gift during
the 1-year period before death, the property’s
fair market value on the date of the gift was
greater than the donor’s adjusted basis, and the
proceeds of the sale of the property are distrib-
uted to the donor (or the donor’s spouse).
Schedule D (Form 1041). To report gains
(and losses) from the sale or exchange of capital
assets by the estate, file Schedule D (Form
1041), Capital Gains and Losses, with Form
1041. For additional information about the treat-
ment of capital gains and losses, see the instruc-
tions for Schedule D (Form 1041).
Installment obligations. If an installment ob-
ligation owned by the decedent is transferred by
the estate to the obligor (buyer or person obli-
gated to pay) or is canceled at death, include the
income from that event in the gross income of
the estate. See Installment obligations under
Income in Respect of a Decedent, earlier. See
Publication 537 for information about installment
sales.
Gain from sale of special-use valuation prop-
erty. If you elected special-use valuation for
farm or other closely held business real property
and that property is sold to a qualified heir, the
estate will recognize gain on the sale if the fair
market value on the date of the sale exceeds the
fair market value on the date of the decedent’s
death (or on the alternate valuation date if it was
elected).
Qualified heirs. Qualified heirs include the
decedent’s ancestors (parents, grandparents,
etc.) and spouse, the decedent’s lineal descend-
ants (children, grandchildren, etc.) and their
spouses, and lineal descendants (and their
spouses) of the decedent’s parents or spouse.
For more information about special-use valu-
ation, see Form 706 and its instructions.
Gain from transfer of property to a political
organization. Appreciated property trans-
ferred to a political organization is treated as
sold by the estate. Appreciated property is prop-
erty that has a fair market value (on the date of
the transfer) greater than the estate’s basis. The
gain recognized is the difference between the
estate’s basis and the fair market value on the
date transferred.
A political organization is any party, commit-
tee, association, fund, or other organization
formed and operated to accept contributions or
make expenditures for influencing the nomina-
tion, election, or appointment of an individual to
any federal, state, or local public office.
Gain or loss on distributions in kind. An
estate recognizes gain or loss on a distribution
of property in kind to a beneficiary only in the
following situations.
1. The distribution satisfies the beneficiary’s
right to receive either:
a. A specific dollar amount (whether pay-
able in cash, in unspecified property, or
in both); or
b. A specific property other than the prop-
erty distributed.
2. You elect to recognize the gain or loss on
the estate’s income tax return (section
643(e)(3) election).
The gain or loss is usually the difference be-
tween the fair market value of the property
when distributed and the estate’s basis in the
property. However, see Gain from sale of spe-
cial-use valuation property, earlier, for a limit
on the gain recognized on a transfer of such
property to a qualified heir.
If you elect to recognize gain or loss, the
election applies to all noncash distributions dur-
ing the tax year except charitable distributions
Publication 559 (2008)
10/19/2009 10:14:53 AM

and specific bequests. To make the election,
report the transaction on Schedule D (Form
1041) attached to the estate’s Form 1041 and
check the box on line 7 in the “Other Information”
section of Form 1041. You must make the elec-
tion by the due date (including extensions) of the
estate’s income tax return for the year of distri-
bution. However, if you timely filed your return
for the year without making the election, you can
still make the election by filing an amended
return within 6 months of the due date of the
return (excluding extensions). Attach Schedule
D (Form 1041) to the amended return and write
“Filed pursuant to section 301.9100-2” on the
form. File the amended return at the same ad-
dress you filed the original return. You must get
the consent of the IRS to revoke the election.
For more information, see Property distrib-
uted in kind under Distributions Deduction, later.
Under the related persons rules, you
!
CAUTION
cannot claim a loss for property distrib-
uted to a beneficiary unless the distri-
bution is in discharge of a pecuniary bequest.
Also, any gain on the distribution of depreciable
property is ordinary income.
Exemption
and Deductions
In figuring taxable income, an estate is generally
allowed the same deductions as an individual.
Special rules, however, apply to some deduc-
tions for an estate. This section includes discus-
sions of those deductions affected by the special
rules.
Exemption Deduction
An estate is allowed an exemption deduction of
$600 in figuring its taxable income. No exemp-
tion for dependents is allowed to an estate. Even
though the first return of an estate may be for a
period of less than 12 months, the exemption is
$600. If, however, the estate was given permis-
sion to change its accounting period, the exemp-
tion is $50 for each month of the short year.
Charitable Contributions
An estate qualifies for a deduction for amounts
of gross income paid or permanently set aside
for qualified charitable organizations. The ad-
justed gross income limits for individuals do not
apply. However, to be deductible by an estate,
the contribution must be specifically provided for
in the decedent’s will. If there is no will, or if the
will makes no provision for the payment to a
charitable organization, then a deduction will not
be allowed even though all of the beneficiaries
may agree to the gift.
You cannot deduct any contribution from in-
come not included in the estate’s gross income.
If the will specifically provides that the contribu-
tions are to be paid out of the estate’s gross
income, the contributions are fully deductible.
However, if the will contains no specific provi-
sions, the contributions are considered to have
been paid and are deductible in the same pro-
portion as the gross income bears to the total of
all classes (taxable and nontaxable) of income.
You cannot deduct a qualified conservation
easement granted after the date of death and
Publication 559 (2008)
1041_Prep_Book_10.indb 189
before the due date of the estate tax return. A
contribution deduction is allowed to the estate
for estate tax purposes.
For more information about contributions,
see Publication 526, Charitable Contributions,
and Publication 561, Determining the Value of
Donated Property.
Losses
Generally, an estate can claim a deduction for a
loss it sustains on the sale of property. This
includes a loss from the sale of property (other
than stock) to a personal representative of the
estate, unless that person is a beneficiary of the
estate.
For a discussion of an estate’s recognized
loss on a distribution of property in kind to a
beneficiary, see Income To Include, earlier.
!
An estate and a beneficiary of that es-
tate are generally treated as related
CAUTION persons for purposes of the disallow-
ance of a loss on the sale of an asset between
related persons. The disallowance does not ap-
ply to a sale or exchange made to satisfy a
pecuniary bequest.
Net operating loss deduction. An estate can
claim a net operating loss deduction, figured in
the same way as an individual’s, except that it
cannot deduct any distributions to beneficiaries
(discussed later) or the deduction for charitable
contributions in figuring the loss or the loss car-
ryover. For a discussion of the carryover of an
unused net operating loss to a beneficiary upon
termination of the estate, see Termination of
Estate, later.
For information on net operating losses, see
Publication 536.
Casualty and theft losses. Losses incurred
from casualties and thefts during the administra-
tion of the estate can be deducted only if they
have not been claimed on the federal estate tax
return (Form 706). You must file a statement
with the estate’s income tax return waiving the
deduction for estate tax purposes. See Adminis-
tration Expenses, later.
The same rules that apply to individuals ap-
ply to the estate, except that in figuring the
adjusted gross income of the estate used to
figure the deductible loss, you deduct any ad-
ministration expenses claimed. Use Form 4684,
Casualties and Thefts, and its instructions to
figure any loss deduction.
Carryover losses. Carryover losses resulting
from net operating losses or capital losses sus-
tained by the decedent before death cannot be
deducted on the estate’s income tax return.
Administration Expenses
Expenses of administering an estate can be
deducted either from the gross estate in figuring
the federal estate tax on Form 706 or from the
estate’s gross income in figuring the estate’s
income tax on Form 1041. However, these ex-
penses cannot be claimed for both estate tax
and income tax purposes. In most cases, this
rule also applies to expenses incurred in the sale
of property by an estate (not as a dealer).
P U B L I C AT I O N 5 5 9 189
To prevent a double deduction, amounts oth-
erwise allowable in figuring the decedent’s tax-
able estate for federal estate tax on Form 706
will not be allowed as a deduction in figuring the
income tax of the estate or of any other person
unless the personal representative files a state-
ment, in duplicate, that the items of expense, as
listed in the statement, have not been claimed
as deductions for federal estate tax purposes
and that all rights to claim such deductions are
waived. One deduction or part of a deduction
can be claimed for income tax purposes if the
appropriate statement is filed, while another de-
duction or part is claimed for estate tax pur-
poses. Claiming a deduction in figuring the
estate income tax is not prevented when the
same deduction is claimed on the estate tax
return so long as the estate tax deduction is not
finally allowed and the preceding statement is
filed. The statement can be filed with the income
tax return or at any time before the expiration of
the statute of limitations that applies to the tax
year for which the deduction is sought. This
waiver procedure also applies to casualty losses
incurred during administration of the estate.
Accrued expenses. The rules preventing
double deductions do not apply to deductions for
taxes, interest, business expenses, and other
items accrued at the date of death. These ex-
penses are allowable as a deduction for estate
tax purposes as claims against the estate and
also are allowable as deductions in respect of a
decedent for income tax purposes. Deductions
for interest, business expenses, and other items
not accrued at the date of the decedent’s death
are allowable only as a deduction for administra-
tion expenses for both estate and income tax
purposes and do not qualify for a double deduc-
tion.
Expenses allocable to tax-exempt income.
When figuring the estate’s taxable income on
Form 1041, you cannot deduct administration
expenses allocable to any of the estate’s
tax-exempt income. However, you can deduct
these administration expenses when figuring
the taxable estate for federal estate tax pur-
poses on Form 706.
Interest on estate tax. Interest paid on install-
ment payments of estate tax is not deductible for
income or estate tax purposes.
Depreciation and Depletion
The allowable deductions for depreciation and
depletion that accrue after the decedent’s death
must be apportioned between the estate and the
beneficiaries, depending on the income of the
estate that is allocable to each.
An estate cannot elect to treat the cost
!
CAUTION
of certain depreciable business assets
as an expense under section 179.
Example. In 2008, the decedent’s estate re-
alized $3,000 of business income during the
administration of the estate. The personal repre-
sentative distributed $1,000 of the income to the
decedent’s son, Ned, and $2,000 to another
son, Bill. The allowable depreciation on the busi-
ness property is $300. Ned can take a deduction
of $100 [($1,000 ÷ $3,000) × $300], and Bill can
take a deduction of $200 [($2,000 ÷ $3,000) ×
$300].
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 190 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
Distribution Deduction
An estate is allowed a deduction for the tax year
for any income that must be distributed currently
and for other amounts that are properly paid,
credited, or required to be distributed to benefi-
ciaries. The deduction is limited to the distributa-
ble net income of the estate.
For special rules that apply in figuring the
estate’s distribution deduction, see Bequest
under Distributions to Beneficiaries From an Es-
tate, later.
Distributable net income. Distributable net
income (determined on Schedule B of Form
1041) is the estate’s income available for distri-
bution. It is the estate’s taxable income, with the
following modifications.
Distributions to beneficiaries. Distribu-
tions to beneficiaries are not deducted.
Estate tax deduction. The deduction for
estate tax on income in respect of the decedent
is not allowed.
Exemption deduction. The exemption de-
duction is not allowed.
Capital gains. Capital gains are not auto-
matically included in distributable net income.
However, you include them in distributable net
income if any of the following apply.
• The gain is allocated to income in the ac-
counts of the estate or by notice to the
beneficiaries under the terms of the will or
by local law.
• The gain is allocated to the corpus or prin-
cipal of the estate and is actually distrib-
uted to the beneficiaries during the tax
year.
• The gain is used, under either the terms of
the will or the practice of the personal rep-
resentative, to determine the amount that
is distributed or must be distributed.
• Charitable contributions are made out of
capital gains.
Generally, when you determine capital gains
to be included in distributable net income, the
exclusion for gain from the sale or exchange of
qualified small business stock is not taken into
account.
Capital losses. Capital losses are excluded
in figuring distributable net income unless they
enter into the computation of any capital gain
that is distributed or must be distributed during
the year.
Tax-exempt interest. Tax-exempt interest,
including exempt-interest dividends, though ex-
cluded from the estate’s gross income, is in-
cluded in the distributable net income, but is
reduced by the following items.
• The expenses that were not allowed in
computing the estate’s taxable income be-
cause they were attributable to tax-exempt
interest (see Expenses allocable to tax-
exempt income under Administration Ex-
penses, earlier).
• The part of the tax-exempt interest
deemed to have been used to make a
charitable contribution. See Charitable
Contributions, earlier.
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1041_Prep_Book_10.indb 190
The total tax-exempt interest earned by an
estate must be shown in the “Other Information”
section of Form 1041. The beneficiary’s part of
the tax-exempt interest is shown on Schedule
K-1 (Form 1041).
Separate shares rule. The separate shares
rule must be used if both of the following are
true.
• The estate has more than one beneficiary.
• The economic interest of a beneficiary
does not affect and is not affected by the
economic interest of another beneficiary.
A bequest of a specific sum of money or of
property is not a separate share (see Bequest,
later).
If the separate shares rule applies, the sepa-
rate shares are treated as separate estates for
the sole purpose of determining the distributable
net income allocable to a share. Each share’s
distributable net income is based on that share’s
portion of gross income and any applicable de-
ductions or losses. You must use a reasonable
and equitable method to make the allocations.
Generally, gross income is allocated among
the separate shares based on the income each
share is entitled to under the will or applicable
local law. This includes gross income not re-
ceived in cash, such as a distributive share of
partnership tax items.
If a beneficiary is not entitled to any of the
estate’s income, the distributable net income for
that beneficiary is zero. The estate cannot de-
duct any distribution made to that beneficiary
and the beneficiary does not have to include the
distribution in its gross income. However, see
Income in respect of a decedent, later in this
discussion.
Example. Patrick’s will directs you, the ex-
ecutor, to distribute ABC Corporation stock and
all dividends from that stock to his son, Edward,
and the residue of the estate to his son, Michael.
The estate has two separate shares consisting
of the dividends on the stock left to Edward and
the residue of the estate left to Michael. The
distribution of the ABC Corporation stock quali-
fies as a bequest, so it is not a separate share.
If any distributions, other than the ABC Cor-
poration stock, are made during the year to
either Edward or Michael, you must determine
the distributable net income for each separate
share. The distributable net income for Edward’s
separate share includes only the dividends at-
tributable to the ABC Corporation stock. The
distributable net income for Michael’s separate
share includes all other income.
Income in respect of a decedent. This in-
come is allocated among the separate shares
that could potentially be funded with these
amounts, even if the share is not entitled to
receive any income under the will or applicable
local law. This allocation is based on the relative
value of each share that could potentially be
funded with these amounts.
Example 1. Frank’s will directs you, the ex-
ecutor, to divide the residue of his estate (valued
at $900,000) equally between his two children,
Judy and Ann. Under the will, you must fund
Judy’s share first with the proceeds of Frank’s
traditional IRA. The $90,000 balance in the IRA
was distributed to the estate during the year.
This amount is included in the estate’s gross
income as income in respect of a decedent and
is allocated to the corpus of the estate. The
estate has two separate shares, one for the
benefit of Judy and one for the benefit of Ann. If
any distributions are made to either Judy or Ann
during the year, then, for purposes of determin-
ing the distributable net income for each sepa-
rate share, the $90,000 of income in respect of a
decedent must be allocated only to Judy’s
share.
Example 2. Assume the same facts as in
Example 1, except that you must fund Judy’s
share first with DEF Corporation stock valued at
$300,000, rather than the IRA proceeds. To de-
termine the distributable net income for each
separate share, the $90,000 of income in re-
spect of a decedent must be allocated between
the two shares to the extent they could poten-
tially be funded with that income. The maximum
amount of Judy’s share that could be funded
with that income is $150,000 ($450,000 value of
share less $300,000 funded with stock). The
maximum amount of Ann’s share that could be
funded is $450,000. Based on the relative val-
ues, Judy’s distributable net income includes
$22,500 ($150,000/$600,000 X $90,000) of the
income in respect of a decedent and Ann’s dis-
tributable net income includes $67,500
($450,000/$600,000 X $90,000).
Income that must be distributed currently.
The distributions deduction includes any income
that, under the terms of the decedent’s will or by
reason of local law, must be distributed cur-
rently. This includes an amount that may be paid
out of income or corpus (such as an annuity) to
the extent it is paid out of income for the tax year.
The deduction is allowed to the estate even if the
personal representative does not make the dis-
tribution until a later year or makes no distribu-
tion until the final settlement and termination of
the estate.
Support allowances. The distribution de-
duction includes any support allowance that,
under a court order or decree or local law, the
estate must pay the decedent’s surviving
spouse or other dependent for a limited period
during administration of the estate. The allow-
ance is deductible as income that must be dis-
tributed currently or as any other amount paid,
credited, or required to be distributed, as dis-
cussed next.
Any other amount paid, credited, or required
to be distributed. Any other amount paid,
credited, or required to be distributed is allowed
as a deduction to the estate only in the year
actually paid, credited, or distributed. If there is
no specific requirement by local law or by the
terms of the will that income earned by the
estate during administration be distributed cur-
rently, a deduction for distributions to the benefi-
ciaries will be allowed to the estate, but only for
the actual distributions during the tax year.
If the personal representative has discretion
as to when the income is distributed, the deduc-
tion is allowed only in the year of distribution.
The personal representative can elect to
treat distributions paid or credited within 65 days
after the close of the estate’s tax year as having
been paid or credited on the last day of that tax
year. The election is made by completing line 6
in the “Other Information” section of Form 1041.
Publication 559 (2008)
10/19/2009 10:14:56 AM

If a tax return is not required, the election is
made on a statement filed with the IRS office
where the return would have been filed. The
election is irrevocable for the tax year and is only
effective for the year of the election.
Alimony and separate maintenance. Ali-
mony and separate maintenance payments that
must be included in the spouse’s or former
spouse’s income may be deducted as income
that must be distributed currently if they are paid,
credited, or distributed out of the income of the
estate for the tax year. That spouse or former
spouse is treated as a beneficiary.
Payment of beneficiary’s obligations. Any
payment made by the estate to satisfy a legal
obligation of any person is deductible as income
that must be distributed currently or as any other
amount paid, credited, or required to be distrib-
uted. This includes a payment made to satisfy
the person’s obligation under local law to sup-
port another person, such as the person’s minor
child. The person whose obligation is satisfied is
treated as a beneficiary of the estate.
This does not apply to a payment made to
satisfy a person’s obligation to pay alimony or
separate maintenance.
Interest in real estate. The value of an inter-
est in real estate owned by a decedent, title to
which passes directly to the beneficiaries under
local law, is not included as any other amount
paid, credited, or required to be distributed.
Property distributed in kind. If an estate dis-
tributes property in kind, the estate’s deduction
ordinarily is the lesser of its basis in the property
or the property’s fair market value when distrib-
uted. However, the deduction is the property’s
fair market value if the estate recognizes gain on
the distribution. See Gain or loss on distributions
in kind under Income To Include, earlier.
Property is distributed in kind if it satisfies the
beneficiary’s right to receive another property or
amount, such as the income of the estate or a
specific dollar amount. It generally includes any
noncash distribution other than the following:
• A specific bequest (unless it must be dis-
tributed in more than three installments) or
• Real property, the title to which passes
directly to the beneficiary under local law.
Character of amounts distributed. If the de-
cedent’s will or local law does not provide for the
allocation of different classes of income, you
must treat the amount deductible for distribu-
tions to beneficiaries as consisting of the same
proportion of each class of items entering into
the computation of distributable net income as
the total of each class bears to the total distribut-
able net income. For more information about the
character of distributions, see Character of Dis-
tributions under Distributions to Beneficiaries
From an Estate, later.
Example. An estate has distributable net in-
come of $2,000, consisting of $1,000 of taxable
interest and $1,000 of rental income. Distribu-
tions to the beneficiary total $1,500. The distri-
bution deduction consists of $750 of taxable
interest and $750 of rental income, unless the
will or local law provides a different allocation.
Limit on deduction for distributions. You
cannot deduct any amount of distributable net
Publication 559 (2008)
1041_Prep_Book_10.indb 191
income not included in the estate’s gross in-
come.
Example. An estate has distributable net in-
come of $2,000, consisting of $1,000 of divi-
dends and $1,000 of tax-exempt interest.
Distributions to the beneficiary total $1,500. Ex-
cept for this rule, the distribution deduction
would be $1,500 ($750 of dividends and $750 of
tax-exempt interest). However, as the result of
this rule, the distribution deduction is limited to
$750, because no deduction is allowed for the
tax-exempt interest distributed.
Denial of double deduction. A deduction
cannot be claimed twice. If an amount is consid-
ered to have been distributed to a beneficiary of
an estate in a preceding tax year, it cannot again
be included in figuring the deduction for the year
of the actual distribution.
Example. The decedent’s will provides that
the estate must distribute currently all of its in-
come to a beneficiary. For administrative conve-
nience, the personal representative did not
make a distribution of a part of the income for the
tax year until the first month of the next tax year.
The amount must be deducted by the estate in
the first tax year, and must be included in the
income of the beneficiary in that year. This
amount cannot be deducted again by the estate
in the following year when it is paid to the benefi-
ciary, nor must the beneficiary again include the
amount in income in that year.
Charitable contribution. The amount of a
charitable contribution used as a deduction by
the estate in determining taxable income cannot
be claimed again as a deduction for a distribu-
tion to a beneficiary.
Funeral and Medical Expenses
No deduction can be taken for funeral expenses
or medical and dental expenses on the estate’s
income tax return, Form 1041.
Funeral expenses. Funeral expenses paid by
the estate are not deductible in figuring the es-
tate’s taxable income on Form 1041. They are
deductible only for determining the taxable es-
tate for federal estate tax purposes on Form
706.
Medical and dental expenses of a decedent.
The medical and dental expenses of a decedent
paid by the estate are not deductible in figuring
the estate’s taxable income on Form 1041. You
can deduct them in figuring the taxable estate for
federal estate tax purposes on Form 706. If
these expenses are paid within the 1-year pe-
riod beginning with the day after the decedent’s
death, you can elect to deduct them on the
decedent’s income tax return (Form 1040) for
the year in which they were incurred. See Medi-
cal Expenses under Final Return for Decedent,
earlier.
Credits, Tax,
and Payments
This section includes brief discussions of some
of the tax credits, types of taxes that may be
owed, and estimated tax payments reported on
the estate’s income tax return, Form 1041.
P U B L I C AT I O N 5 5 9 191
Credits
Estates generally are allowed some of the same
tax credits that are allowed to individuals. The
credits generally are allocated between the es-
tate and the beneficiaries. However, estates are
not allowed the credit for the elderly or the dis-
abled, the child tax credit, or the earned income
credit discussed earlier under Final Return for
Decedent.
Foreign tax credit. The foreign tax credit is
discussed in Publication 514, Foreign Tax Credit
for Individuals.
General business credit. The general busi-
ness credit is available to an estate that is in-
volved in a business. For more information, see
Publication 334.
Tax
You cannot use the Tax Table that applies to
individuals to figure the estate tax. You must use
the tax rate schedule in the Instructions for Form
1041 to figure the estate tax.
Alternative minimum tax (AMT). An estate
may be liable for the alternative minimum tax. To
figure the alternative minimum tax, use Sched-
ule I (Form 1041), Alternative Minimum Tax.
Certain credits may be limited by any tentative
minimum tax figured on line 54, Part III of Sched-
ule I (Form 1041), even if there is no alternative
minimum tax liability.
If the estate takes a deduction for distribu-
tions to beneficiaries, complete Part I and Part II
of Schedule I even if the estate does not owe
alternative minimum tax. Allocate the income
distribution deduction figured on a minimum tax
basis among the beneficiaries and report each
beneficiary’s share on Schedule K-1 (Form
1041). Also, show each beneficiary’s share of
any adjustments or tax preference items for de-
preciation, depletion, and amortization.
For more information, see the Instructions for
Schedule I (Form 1041).
Payments
The estate’s income tax liability must be paid in
full when the return is filed. You may have to pay
estimated tax, however, as explained below.
Estimated tax. Estates with tax years ending
2 or more years after the date of the decedent’s
death must pay estimated tax in the same man-
ner as individuals.
If you must make estimated tax payments for
2009, use Form 1041-ES, Estimated Income
Tax for Estates and Trusts, to determine the
estimated tax to be paid.
Generally, you must pay estimated tax if the
estate is expected to owe, after subtracting any
withholding and credits, at least $1,000 in tax for
2009. You will not, however, have to pay esti-
mated tax if you expect the withholding and
credits to be at least:
1. 90% of the tax to be shown on the 2009
return or
2. 100% of the tax shown on the 2008 return
(assuming the return covered all 12
months).
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The percentage in (2) above is 110% if the
estate’s 2008 adjusted gross income (AGI) was
more than $150,000 (and less than 2/3 of gross
income for 2008 or 2009 is from farming or
fishing). To figure the estate’s AGI, see the in-
structions for line 15b, Form 1041.
The general rule is that you must make your
first estimated tax payment by April 15, 2009.
You can either pay all of your estimated tax at
that time or pay it in four equal amounts that are
due by April 15, 2009; June 15, 2009; Septem-
ber 15, 2009; and January 15, 2010. For excep-
tions to the general rule, see the Instructions for
Form 1041-ES and Publication 505, Tax With-
holding and Estimated Tax.
If your return is on a fiscal year basis, your
due dates are the 15th day of the 4th, 6th, and
9th months of your fiscal year and the 1st month
of the following fiscal year. If any of these dates
fall on a Saturday, Sunday, or legal holiday, the
payment must be made by the next business
day.
You may be charged a penalty for not paying
enough estimated tax or for not making the pay-
ment on time in the required amount (even if you
have an overpayment on your tax return). You
can use Form 2210, Underpayment of Esti-
mated Tax by Individuals, Estates, and Trusts,
to figure any penalty, or you can let the IRS
figure the penalty.
For more information, see the Instructions for
Form 1041-ES and Publication 505. Also, see
“Transfer of Credit for Estimated Tax Pay-
ments”, later, for information regarding the
transfer of the estate’s estimated tax payments
to the beneficiary(ies).
Name, Address,
and Signature
In the top space of the name and address area
of Form 1041, enter the exact name of the estate
used to apply for the estate’s employer identifi-
cation number. In the remaining spaces, enter
the name and address of the personal represen-
tative (fiduciary) of the estate.
Signature. The personal representative (or its
authorized officer if the personal representative
is not an individual) must sign the return. An
individual who prepares the return for pay must
sign the return as preparer. You can check a box
in the signature area that authorizes the IRS to
contact that paid preparer for certain informa-
tion. See the instructions for Form 1041 for more
information.
When and Where To File
When you file Form 1041 (or Form 1040NR if it
applies) depends on whether you choose a cal-
endar year or a fiscal year as the estate’s ac-
counting period. Where you file Form 1041
depends on where you, as the personal repre-
sentative, live or have your principal office.
When to file. If you choose the calendar year
as the estate’s accounting period, the Form
1041 for 2008 is due by April 15, 2009 (June 15,
2009, in the case of Form 1040NR for a nonresi-
dent alien estate that does not have an office in
the United States). If you choose a fiscal year,
the Form 1041 is due by the 15th day of the 4th
month (6th month in the case of Form 1040NR)
after the end of the tax year. If the due date is a
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1041_Prep_Book_10.indb 192
Saturday, Sunday, or legal holiday, the form
must be filed by the next business day.
Extension of time to file. You can request
an automatic 5-month extension of time to file
Form 1041 by filing Form 7004, Application for
Automatic Extension of Time To File Certain
Business Income Tax, Information, and Other
Returns. The extension is automatic, so you do
not have to sign the form or provide a reason for
your request. You must file Form 7004 on or
before the regular due date of Form 1041. Form
7004 can be electronically filed. For additional
information, see the Instructions for Form 7004.
Generally, an extension of time to file a re-
turn does not extend the time for payment of tax
due. You must pay the total income tax esti-
mated to be due on Form 1041 in full by the
regular due date of the return. For additional
information, see the Instructions for Form 7004.
Where to file. As the personal representative
of an estate, file the estate’s income tax return
(Form 1041) with the Internal Revenue Service
Center for the state where you live or have your
principal place of business. A list of the states
and addresses that apply is in the instructions
for Form 1041.
You must send Form 1040NR to:
Department of the Treasury
Internal Revenue Service Center
Cincinnati, OH 45999-0048, U.S.A.
Electronic filing. Form 1041 can be filed
electronically. See the Instructions for Form
1041 for more information.
Distributions
to Beneficiaries
From an Estate
If you are the beneficiary of an estate that must
distribute all its income currently, you must re-
port your share of the distributable net income
whether or not you have actually received it.
If you are the beneficiary of an estate that
does not have to distribute all its income cur-
rently, you must report all income that must be
distributed to you (whether or not actually dis-
tributed) plus all other amounts paid, credited, or
required to be distributed to you, up to your
share of distributable net income. As explained
earlier in Distributions Deduction under Income
Tax Return of an Estate — Form 1041, for an
amount to be currently distributable income,
there must be a specific requirement for current
distribution either under local law or the terms of
the decedent’s will. If there is no such require-
ment, the income is reportable only when distrib-
uted.
If the estate has more than one beneficiary,
the separate shares rule discussed earlier under
Distributions Deduction may have to be used to
determine the distributable net income allocable
to each beneficiary. The beneficiaries in the ex-
amples shown next do not meet the require-
ments of the separate shares rule.
Income That Must Be
Distributed Currently
Beneficiaries who are entitled to receive cur-
rently distributable income generally must in-
clude in gross income the entire amount due
them. However, if the currently distributable in-
come is more than the estate’s distributable net
income figured without deducting charitable
contributions, each beneficiary must include in
gross income a ratable part of the distributable
net income.
Example. Under the terms of the will of Ger-
ald Peters, $5,000 a year is to be paid to his
widow and $2,500 a year is to be paid to his
daughter out of the estate’s income during the
period of administration. There are no charitable
contributions. For the year, the estate’s distribut-
able net income is only $6,000. The distributable
net income is less than the currently distributa-
ble income, so the widow must include in her
gross income only $4,000 [($5,000 ÷ $7,500) ×
$6,000], and the daughter must include in her
gross income only $2,000 [($2,500 ÷ $7,500) ×
$6,000].
Annuity payable out of income or corpus.
Income that must be distributed currently in-
cludes any amount that must be paid out of
income or corpus (principal of the estate) to the
extent the amount is satisfied out of income for
the tax year. An annuity that must be paid in all
events (either out of income or corpus) would
qualify as income that must be distributed cur-
rently to the extent there is income of the estate
not paid, credited, or required to be distributed to
other beneficiaries for the tax year.
Example 1. Henry Frank’s will provides that
$500 be paid to the local Community Chest out
of income each year. It also provides that $2,000
a year is currently distributable out of income to
his brother, Fred, and an annuity of $3,000 is to
be paid to his sister, Sharon, out of income or
corpus. Capital gains are allocable to corpus,
but all expenses are to be charged against in-
come. Last year, the estate had income of
$6,000 and expenses of $3,000. The personal
representative paid the $500 to the Community
Chest and made the distributions to Fred and
Sharon as required by the will.
The estate’s distributable net income (fig-
ured before the charitable contribution) is
$3,000. The currently distributable income totals
$2,500 ($2,000 to Fred and $500 to Sharon).
The income available for Sharon’s annuity is
only $500 because the will requires that the
charitable contribution be paid out of current
income. The $2,500 treated as distributed cur-
rently is less than the $3,000 distributable net
income (before the contribution), so Fred must
include $2,000 in his gross income and Sharon
must include $500 in her gross income.
Example 2. Assume the same facts as in
Example 1 except that the estate has an addi-
tional $1,000 of administration expenses, com-
missions, etc., that are chargeable to corpus.
The estate’s distributable net income (figured
before the charitable contribution) is now $2,000
($3,000 − $1,000 additional expense). The
amount treated as currently distributable income
is still $2,500 ($2,000 to Fred and $500 to
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10/19/2009 10:14:58 AM

Sharon). The $2,500, treated as distributed cur-
rently, is more than the $2,000 distributable net
income, so Fred has to include only $1,600
[($2,000 ÷ $2,500) × $2,000] in his gross income
and Sharon has to include only $400 [($500 ÷
$2,500) × $2,000] in her gross income. Fred and
Sharon are beneficiaries of amounts that must
be distributed currently, so they do not benefit
from the reduction of distributable net income by
the charitable contribution deduction.
Other Amounts
Distributed
Any other amount paid, credited, or required to
be distributed to the beneficiary for the tax year
also must be included in the beneficiary’s gross
income. Such an amount is in addition to those
amounts that must be distributed currently, as
discussed earlier. It does not include gifts or
bequests of specific sums of money or specific
property if such sums are paid in three or fewer
installments. However, amounts that can be
paid only out of income are not excluded under
this rule. If the sum of the income that must be
distributed currently and other amounts paid,
credited, or required to be distributed exceeds
distributable net income, these other amounts
are included in the beneficiary’s gross income
only to the extent distributable net income ex-
ceeds the income that must be distributed cur-
rently. If there is more than one beneficiary,
each will include in gross income only a pro rata
share of such amounts.
The personal representative can elect to
treat distributions paid or credited by the estate
within 65 days after the close of the estate’s tax
year as having been paid or credited on the last
day of that tax year.
The following are examples of other
amounts distributed.
• Distributions made at the discretion of the
personal representative.
• Distributions required by the terms of the
will upon the happening of a specific
event.
• Annuities that must be paid in any event,
but only out of corpus (principal).
• Distributions of property in kind as defined
earlier in Distributions Deduction under
Income Tax Return of an Estate — Form
1041.
• Distributions required for the support of
the decedent’s surviving spouse or other
dependent for a limited period, but only
out of corpus (principal).
If an estate distributes property in kind, the
amount of the distribution ordinarily is the lesser
of the estate’s basis in the property or the prop-
erty’s fair market value when distributed. How-
ever, the amount of the distribution is the
property’s fair market value if the estate recog-
nizes gain on the distribution. See Gain or loss
on distributions in kind in the discussion Income
To Include under Income Tax Return of an Es-
tate — Form 1041, earlier.
Example. The terms of Michael Scott’s will
require the distribution of $2,500 of income an-
nually to his wife, Susan. If any income remains,
it may be accumulated or distributed to his two
Publication 559 (2008)
1041_Prep_Book_10.indb 193
children, Joe and Alice, in amounts at the discre-
tion of the personal representative. The per-
sonal representative also may invade the corpus
(principal) for the benefit of Scott’s wife and
children.
Last year, the estate had income of $6,000
after deduction of all expenses. Its distributable
net income is also $6,000. The personal repre-
sentative distributed the required $2,500 of in-
come to Susan. In addition, the personal
representative distributed $1,500 each to Joe
and Alice and an additional $2,000 to Susan.
Susan includes in her gross income the
$2,500 of currently distributable income. The
other amounts distributed totaled $5,000
($1,500 + $1,500 + $2,000) and are includible in
the income of Susan, Joe, and Alice to the ex-
tent of $3,500 (distributable net income of
$6,000 minus currently distributable income to
Susan of $2,500). Susan will include an addi-
tional $1,400 [($2,000 ÷ $5,000) × $3,500] in her
gross income. Joe and Alice each will include
$1,050 [($1,500 ÷ $5,000) × $3,500] in their
gross incomes.
Discharge of a
Legal Obligation
If an estate, under the terms of a will, discharges
a legal obligation of a beneficiary, the discharge
is included in that beneficiary’s income as either
currently distributable income or other amount
paid. This does not apply to the discharge of a
beneficiary’s obligation to pay alimony or sepa-
rate maintenance.
The beneficiary’s legal obligations include a
legal obligation of support, for example, of a
minor child. Local law determines a legal obliga-
tion of support.
Character of Distributions
An amount distributed to a beneficiary for inclu-
sion in gross income retains the same character
for the beneficiary that it had for the estate.
No charitable contribution made. If no chari-
table contribution is made during the tax year,
you must treat the distributions as consisting of
the same proportion of each class of items en-
tering into the computation of distributable net
income as the total of each class bears to the
total distributable net income. Distributable net
income was defined earlier in Distributions De-
duction under Income Tax Return of an Es-
tate — Form 1041. However, if the will or local
law specifically provides or requires a different
allocation, you must use that allocation.
Example 1. An estate has distributable net
income of $3,000, consisting of $1,800 in rents
and $1,200 in taxable interest. There is no provi-
sion in the will or local law for the allocation of
income. The personal representative distributes
$1,500 each to Jim and Ted, beneficiaries under
their father’s will. Each will be treated as having
received $900 in rents and $600 of taxable inter-
est.
Example 2. Assume in Example 1 that the
will provides for the payment of the taxable inter-
est to Jim and the rental income to Ted and that
the personal representative distributed the in-
come under those provisions. Jim is treated as
having received $1,200 in taxable interest and
P U B L I C AT I O N 5 5 9 193
Ted is treated as having received $1,800 of
rental income.
Charitable contribution made. If a charitable
contribution is made by an estate and the terms
of the will or local law provide for the contribution
to be paid from specified sources, that provision
governs. If no provision or requirement exists,
the charitable contribution deduction must be
allocated among the classes of income entering
into the computation of the income of the estate
before allocation of other deductions among the
items of distributable net income. In allocating
items of income and deductions to beneficiaries
to whom income must be distributed currently,
the charitable contribution deduction is not taken
into account to the extent that it exceeds income
for the year reduced by currently distributable
income.
Example. The will of Harry Thomas re-
quires a current distribution out of income of
$3,000 a year to his wife, Betty, during the ad-
ministration of the estate. The will also provides
that the personal representative, using discre-
tion, may distribute the balance of the current
earnings either to Harry’s son, Tim, or to one or
more of certain designated charities. Last year,
the estate’s income consisted of $4,000 of tax-
able interest and $1,000 of tax-exempt interest.
There were no deductible expenses. The per-
sonal representative distributed the $3,000 to
Betty, made a contribution of $2,500 to the local
heart association, and paid $1,500 to Tim.
The distributable net income for determining
the character of the distribution to Betty is
$3,000. The charitable contribution deduction to
be taken into account for this computation is
$2,000 (the estate’s income ($5,000) minus the
currently distributable income ($3,000)). The
$2,000 charitable contribution deduction must
be allocated: $1,600 [($4,000 ÷ $5,000) ×
$2,000] to taxable interest and $400 [($1,000 ÷
$5,000) × $2,000] to tax-exempt interest. Betty
is considered to have received $2,400 ($4,000 −
$1,600) of taxable interest and $600 ($1,000 −
$400) of tax-exempt interest. She must include
the $2,400 in her gross income. She must report
the $600 of tax-exempt interest, but it is not
taxable.
To determine the amount to be included in
Tim’s gross income, however, take into account
the entire charitable contribution deduction. The
currently distributable income is greater than the
estate’s income after taking into account the
charitable contribution deduction, so none of the
amount paid to Tim must be included in his
gross income for the year.
How and When To Report
How you report your income from the estate
depends on the character of the income in the
hands of the estate. When you report the income
depends on whether it represents amounts
credited or required to be distributed to you or
other amounts.
How to report estate income. Each item of
income keeps the same character in your hands
as it had in the hands of the estate. If the items of
income distributed or considered to be distrib-
uted to you include dividends, tax-exempt inter-
est, or capital gains, they will keep the same
character in your hands for purposes of the tax
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 194 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
treatment given those items. Generally, you re-
port the dividends on line 9a of your Form 1040,
and the capital gains on your Schedule D (Form
1040). The tax-exempt interest, while not in-
cluded in taxable income, must be shown on line
8b of your Form 1040. Report business and
other nonpassive income in Part III of your
Schedule E (Form 1040).
The estate’s personal representative should
provide you with the classification of the various
items that make up your share of the estate
income and the credits you should take into
consideration so you can properly prepare your
individual income tax return. See Schedule K-1
(Form 1041), later.
When to report estate income. If income
from the estate is credited or must be distributed
to you for a tax year, report that income (even if
not distributed) on your return for that year. The
personal representative can elect to treat distri-
butions paid or credited within 65 days after the
close of the estate’s tax year as having been
paid or credited on the last day of that tax year. If
this election is made, you must report that distri-
bution on your return for that year.
Report other income from the estate on your
return for the year in which you receive it. If your
tax year is different from the estate’s tax year,
see Different tax years, next.
Different tax years. You must include your
share of the estate income in your return for your
tax year in which the last day of the estate’s tax
year falls. If the tax year of the estate is the
calendar year and your tax year is a fiscal year
ending on June 30, you will include in gross
income for the tax year ended June 30 your
share of the estate’s distributable net income
distributed or considered distributed during the
calendar year ending the previous December
31.
Death of individual beneficiary. If an indi-
vidual beneficiary dies, the beneficiary’s share
of the estate’s distributable net income may be
distributed or be considered distributed by the
estate for its tax year that does not end with or
within the last tax year of the beneficiary. In this
case, the estate income that must be included in
the gross income on the beneficiary’s final return
is based on the amounts distributed or consid-
ered distributed during the tax year of the estate
in which his or her last tax year ended. However,
for a cash basis beneficiary, the gross income of
the last tax year includes only the amounts actu-
ally distributed before death. Income that must
be distributed to the beneficiary but, in fact, is
distributed to the beneficiary’s estate after death
is included in the gross income of the benefi-
ciary’s estate as income in respect of a dece-
dent.
Termination of nonindividual beneficiary.
If a beneficiary that is not an individual, for ex-
ample a trust or a corporation, ceases to exist,
the amount included in its gross income for its
last tax year is determined as if the beneficiary
were a deceased individual. However, income
that must be distributed before termination, but
which is actually distributed to the beneficiary’s
successor in interest, is included in the gross
income of the nonindividual beneficiary for its
last tax year.
Schedule K-1 (Form 1041). The personal
representative for the estate must provide you
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1041_Prep_Book_10.indb 194
with a copy of Schedule K-1 (Form 1041) or a
substitute Schedule K-1. You should not file the
form with your Form 1040, but should keep it for
your personal records.
Each beneficiary (or nominee of a benefi-
ciary) who receives a distribution from the estate
for the tax year or to whom any item is allocated
must receive a Schedule K-1 or substitute. The
personal representative handling the estate
must furnish the form to each beneficiary or
nominee by the date on which the Form 1041 is
filed.
Nominees. A person who holds an interest
in an estate as a nominee for a beneficiary must
provide the estate with the name and address of
the beneficiary, and any other required informa-
tion. The nominee must provide the beneficiary
with the information received from the estate.
Penalty. A personal representative (or nom-
inee) who fails to provide the correct information
may be subject to a $50 penalty for each failure.
Consistent treatment of items. You must
treat estate items the same way on your individ-
ual return as they are treated on the estate’s
income tax return. If your treatment is different
from the estate’s treatment, you must file Form
8082, Notice of Inconsistent Treatment or Ad-
ministrative Adjustment Request (AAR), with
your return to identify the difference. If you do
not file Form 8082 and the estate has filed a
return, the IRS can immediately assess and
collect any tax and penalties that result from
adjusting the item to make it consistent with the
estate’s treatment.
Bequest
A bequest is the act of giving or leaving property
to another through the last will and testament.
Generally, any distribution of income (or prop-
erty in kind) to a beneficiary is an allowable
deduction to the estate and is includible in the
beneficiary’s gross income to the extent of the
estate’s distributable net income. However, a
distribution will not be an allowable deduction to
the estate and will not be includible in the benefi-
ciary’s gross income if the distribution meets the
following requirements.
• It is required by the terms of the will.
• It is a gift or bequest of a specific sum of
money or property.
• It is paid out in three or fewer installments
under the terms of the will.
Specific sum of money or property. To meet
this test, the amount of money or the identity of
the specific property must be determinable
under the decedent’s will as of the date of death.
To qualify as specific property, the property
must be identifiable both as to its kind and its
amount.
Example 1. Dave Rogers’ will provided that
his son, Ed, receive Dave’s interest in the Rog-
ers-Jones partnership. Dave’s daughter, Marie,
would receive a sum of money equal to the value
of the partnership interest given to Ed. The be-
quest to Ed is a gift of a specific property ascer-
tainable at the date of Dave Rogers’ death. The
bequest of a specific sum of money to Marie is
determinable on the same date.
Example 2. Mike Jenkins’ will provided that
his widow, Helen, would receive money or prop-
erty to be selected by the personal representa-
tive equal in value to half of his adjusted gross
estate. The identity of the property and the
money in the bequest are dependent on the
personal representative’s discretion and the
payment of administration expenses and other
charges, which are not determinable at the date
of Mike’s death. As a result, the provision is not a
bequest of a specific sum of money or of specific
property, and any distribution under that provi-
sion is a deduction for the estate and income to
the beneficiary (to the extent of the estate’s
distributable net income). The fact that the be-
quest will be specific sometime before distribu-
tion is immaterial. It is not ascertainable by the
terms of the will as of the date of death.
Distributions not treated as bequests. The
following distributions are not bequests that
meet all the requirements listed earlier that allow
a distribution to be excluded from the benefi-
ciary’s income and do not allow it as a deduction
to the estate.
Paid only from income. An amount that
can be paid only from current or prior income of
the estate does not qualify even if it is specific in
amount and there is no provision for installment
payments.
Annuity. An annuity or a payment of money
or of specific property in lieu of, or having the
effect of, an annuity is not the payment of spe-
cific property or a sum of money.
Residuary estate. If the will provides for the
payment of the balance or residue of the estate
to a beneficiary of the estate after all expenses
and other specific legacies or bequests, that
residuary bequest is not a payment of specific
property or a sum of money.
Gifts made in installments. Even if the gift
or bequest is made in a lump sum or in three or
fewer installments, it will not qualify as specific
property or a sum of money if the will provides
that the amount must be paid in more than three
installments.
Conditional bequests. A bequest of specific
property or a sum of money that may otherwise
be excluded from the beneficiary’s gross income
will not lose the exclusion solely because the
payment is subject to a condition.
Installment payments. Certain rules apply in
determining whether a bequest of specific prop-
erty or a sum of money has to be paid or credited
to a beneficiary in more than three installments.
Personal items. Do not take into account
bequests of articles for personal use, such as
personal and household effects and automo-
biles.
Real property. Do not take into account
specifically designated real property, the title to
which passes under local law directly to the
beneficiary.
Other property. All other bequests under
the decedent’s will for which no time of payment
or crediting is specified and that are to be paid or
credited in the ordinary course of administration
of the estate are considered as required to be
paid or credited in a single installment. Also, all
bequests payable at any one specified time
Publication 559 (2008)
10/19/2009 10:15:01 AM

under the terms of the will are treated as a single
installment.
Testamentary trust. In determining the
number of installments that must be paid or
credited to a beneficiary, the decedent’s estate
and a testamentary trust created by the dece-
dent’s will are treated as separate entities.
Amounts paid or credited by the estate and by
the trust are counted separately.
Termination of Estate
The termination of an estate generally is marked
by the end of the period of administration and by
the distribution of the assets to the beneficiaries
under the terms of the will or under the laws of
succession of the state if there is no will. These
beneficiaries may or may not be the same per-
sons as the beneficiaries of the estate’s income.
Period of Administration
The period of administration is the time actually
required by the personal representative to as-
semble all of the decedent’s assets, pay all the
expenses and obligations, and distribute the as-
sets to the beneficiaries. This may be longer or
shorter than the time provided by local law for
the administration of estates.
Ends if all assets distributed. If all assets
are distributed except for a reasonable amount
set aside, in good faith, for the payment of unas-
certained or contingent liabilities and expenses
(but not including a claim by a beneficiary, as a
beneficiary), the estate will be considered termi-
nated.
Ends if period unreasonably long. If settle-
ment is prolonged unreasonably, the estate will
be treated as terminated for federal income tax
purposes. From that point on, the income, de-
ductions, and credits of the estate are consid-
ered those of the person or persons succeeding
to the property of the estate.
Transfer of Unused
Deductions to Beneficiaries
If the estate has unused loss carryovers or ex-
cess deductions for its last tax year, they are
allowed to those beneficiaries who succeed to
the estate’s property. See Successor benefi-
ciary, later.
Unused loss carryovers. An unused net op-
erating loss carryover or capital loss carryover
existing upon termination of the estate is al-
lowed to the beneficiaries succeeding to the
property of the estate. That is, these deductions
will be claimed on the beneficiary’s tax return.
This treatment occurs only if a carryover would
have been allowed to the estate in a later tax
year if the estate had not been terminated.
Both types of carryovers generally keep their
same character for the beneficiary as they had
for the estate. However, if the beneficiary of a
capital loss carryover is a corporation, the cor-
poration will treat the carryover as a short-term
capital loss regardless of its status in the estate.
The net operating loss carryover and the capital
loss carryover are used in figuring the benefi-
ciary’s adjusted gross income and taxable in-
come. The beneficiary may have to adjust any
Publication 559 (2008)
1041_Prep_Book_10.indb 195
net operating loss carryover in figuring the alter-
native minimum tax.
The first tax year to which the loss is carried
is the beneficiary’s tax year in which the estate
terminates. If the loss can be carried to more
than one tax year, the estate’s last tax year
(whether or not a short tax year) and the benefi-
ciary’s first tax year to which the loss is carried
each constitute a tax year for figuring the num-
ber of years to which a loss may be carried. A
capital loss carryover from an estate to a corpo-
rate beneficiary will be treated as though it re-
sulted from a loss incurred in the estate’s last tax
year (whether or not a short tax year), regard-
less of when the estate actually incurred the
loss.
If the last tax year of the estate is the last tax
year to which a net operating loss may be car-
ried, see No double deductions, later. For a
general discussion of net operating losses, see
Publication 536. For a discussion of capital
losses and capital loss carryovers, see Publica-
tion 550.
Excess deductions. If the deductions in the
estate’s last tax year (other than the exemption
deduction or the charitable contributions deduc-
tion) are more than gross income for that year,
the beneficiaries succeeding to the estate’s
property can claim the excess as a deduction in
figuring taxable income. To establish these de-
ductions for the beneficiaries, a return must be
filed for the estate along with a schedule show-
ing the computation of each kind of deduction
and the allocation of each to the beneficiaries.
An individual beneficiary must itemize de-
ductions to claim these excess deductions. The
deduction is claimed on Schedule A (Form
1040), subject to the 2% limit on miscellaneous
itemized deductions. The beneficiaries can
claim the deduction only for the tax year in which
or with which the estate terminates, whether the
year of termination is a normal year or a short
tax year.
No double deductions. A net operating
loss deduction allowable to a successor benefi-
ciary cannot be considered in figuring the ex-
cess deductions on termination. However, if the
estate’s last tax year is the last year in which a
deduction for a net operating loss can be taken,
the deduction, to the extent not absorbed in the
last return of the estate, is treated as an excess
deduction on termination. Any item of income or
deduction, or any part thereof, that is taken into
account in figuring a net operating loss or a
capital loss carryover of the estate for its last tax
year cannot be used again to figure the excess
deduction on termination.
Successor beneficiary. A beneficiary entitled
to an unused loss carryover or an excess deduc-
tion is the beneficiary who, upon the estate’s
termination, bears the burden of any loss for
which a carryover is allowed or of any deduc-
tions more than gross income.
If decedent had no will. If the decedent
had no will, the beneficiaries are those heirs or
next of kin to whom the estate is distributed. If
the estate is insolvent, the beneficiaries are
those to whom the estate would have been dis-
tributed had it not been insolvent. If the dece-
dent’s spouse is entitled to a specified dollar
amount of property before any distributions to
P U B L I C AT I O N 5 5 9 195
other heirs and the estate is less than that
amount, the spouse is the beneficiary to the
extent of the deficiency.
If decedent had a will. If the decedent had
a will, a beneficiary normally means the residu-
ary beneficiaries (including residuary trusts).
Those beneficiaries who receive a specific prop-
erty or a specific amount of money ordinarily are
not considered residuary beneficiaries, except
to the extent the specific amount is not paid in
full.
Also, a beneficiary who is not strictly a resid-
uary beneficiary, but whose devise or bequest is
determined by the value of the estate as re-
duced by the loss or deduction, is entitled to the
carryover or the deduction. For example, this
would include the following beneficiaries.
• A beneficiary of a fraction of the dece-
dent’s net estate after payment of debts,
expenses, and specific bequests.
• A nonresiduary beneficiary, when the es-
tate is unable to satisfy the bequest in full.
• A surviving spouse receiving a fractional
share of the estate in fee under a statutory
right of election when the losses or deduc-
tions are taken into account in determining
the share. However, such a beneficiary
does not include a recipient of a dower or
curtesy, or a beneficiary who receives any
income from the estate from which the
loss or excess deduction is carried over.
Allocation among beneficiaries. The total of
the unused loss carryovers or the excess deduc-
tions on termination that may be deducted by the
successor beneficiaries is to be divided accord-
ing to the share of each in the burden of the loss
or deduction.
Example. Under his father’s will, Arthur is to
receive $20,000. The remainder of the estate is
to be divided equally between his brothers, Mark
and Tom. After all expenses are paid, the estate
has sufficient funds to pay Arthur only $15,000,
with nothing to Mark and Tom. In the estate’s
last tax year, there are excess deductions of
$5,000 and $10,000 of unused loss carryovers.
The total of the excess deductions and unused
loss carryovers is $15,000 and Arthur is consid-
ered a successor beneficiary to the extent of
$5,000, so he is entitled to one-third of the un-
used loss carryover and one-third of the excess
deductions. His brothers may divide the other
two-thirds of the excess deductions and the un-
used loss carryovers between them.
Transfer of Credit for
Estimated Tax Payments
When an estate terminates, the personal repre-
sentative can elect to transfer to the beneficia-
ries the credit for all or part of the estate’s
estimated tax payments for the last tax year. To
make this election, the personal representative
must complete Form 1041-T, Allocation of Esti-
mated Tax Payments to Beneficiaries, and file it
either separately or with the estate’s final Form
1041. The Form 1041-T must be filed by the
65th day after the close of the estate’s tax year.
Page 23
10/19/2009 10:15:02 AM
 196 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
Filing Form 1041-T with Form 1041
!
CAUTION
does not change the due date for filing
Form 1041-T. The IRS will reject a late
filed election. If Form 1041-T is rejected and
Form 1041 was filed based on a successful
election then the personal representative must
file an amended Form 1041, including amended
Schedule K-1(s).
The estimated tax allocated to each benefi-
ciary is treated as paid or credited to the benefi-
ciary on the last day of the estate’s final tax year
and must be reported in box 13, Schedule K-1
(Form 1041) using code A. If the estate termi-
nated in 2008, this amount is treated as a pay-
ment of 2008 estimated tax made by the
beneficiary on January 15, 2009.
Form 706
Generally, for estate tax purposes, you must file
Form 706, United States Estate (and Genera-
tion-Skipping Transfer) Tax Return. If death oc-
curs in 2008, Form 706 must be filed if the gross
estate is more than $2,000,000.
If you must file Form 706, it has to be done
within 9 months after the date of the decedent’s
death unless you receive an extension of time to
file. Use Form 4768, Application for Extension of
Time To File a Return and/or Pay U.S. Estate
(and Generation-Skipping Transfer) Taxes, to
apply for an automatic 6-month extension of
time.
Comprehensive
Example
The following is an example of a typical situa-
tion. All figures on the filled-in forms have been
rounded to the nearest whole dollar.
On April 9, 2008, your father, John R. Smith,
died at the age of 62. He had not resided in a
community property state. His will named you to
serve as his executor (personal representative).
Except for specific bequests to your mother,
Mary, of your parents’ home and your father’s
automobile and a bequest of $5,000 to his
church, your father’s will named your mother
and his brother as beneficiaries.
After the court has approved your appoint-
ment as the executor, you should obtain an
employer identification number for the estate.
(See Duties under Personal Representatives,
earlier.) Next, you use Form 56 to notify the
Internal Revenue Service that you have been
appointed executor of your father’s estate.
Assets of the estate. Your father had the fol-
lowing assets when he died.
• His checking account balance was $2,550
and his savings account balance was
$53,650.
• Your father inherited your parents’ home
from his parents on March 5, 1979. At that
time it was worth $42,000, but was ap-
praised at the time of your father’s death
at $150,000. The home was free of ex-
isting debts (or mortgages) at the time of
his death.
Page 24
1041_Prep_Book_10.indb 196
• Your father owned 500 shares of ABC
Company stock that had cost him $10.20
a share in 1983. The stock had a mean
selling price (midpoint between highest
and lowest selling price) of $25 a share on
the day he died. He also owned 500
shares of XYZ Company stock that had
cost him $30 a share in 1988. The stock
had a mean selling price on the date of
death of $22.
• The appraiser valued your father’s auto-
mobile at $6,300 and the household ef-
fects at $18,500.
• Your father owned a coin collection and a
stamp collection. The face value of the
coins in the collection was only $600, but
the appraiser valued it at $2,800. The
stamp collection was valued at $3,500.
• Your father’s employer sent a check to
your mother for $11,082 ($12,000 − $918
for social security and Medicare taxes),
representing unpaid salary and payment
for accrued vacation time. The statement
that came with the check indicated that no
amount was withheld for income tax. The
check was made out to the estate, so your
mother gave you the check.
• The Easy Life Insurance Company gave
your mother a check for $275,000 be-
cause she was the beneficiary of his life
insurance policy.
• Your father was the owner of several se-
ries EE U.S. savings bonds on which he
named your mother as co-owner. Your fa-
ther purchased the bonds during the past
several years. The cost of these bonds
totaled $2,500. After referring to the ap-
propriate table of redemption values (see
U.S. savings bonds acquired from dece-
dent, earlier), you determine that interest
of $840 had accrued on the bonds at the
date of your father’s death. You must in-
clude the redemption value of these bonds
at date of death, $3,340, in your father’s
gross estate.
• On July 1, 1994, your parents purchased a
house for $90,000. They have held the
property for rental purposes continuously
since its purchase. Your mother paid
one-third of the purchase price, or
$30,000, and your father paid $60,000.
They owned the property, however, as
joint tenants with right of survivorship. An
appraiser valued the property at $120,000.
You include $60,000, one-half of the
value, in your father’s gross estate be-
cause your parents owned the property as
joint tenants with right of survivorship and
they were the only joint tenants.
Your mother also gave you a Form W-2,
Wage and Tax Statement, that your father’s
employer had sent. In examining it, you discover
that your father had been paid $11,000 in salary
between January 1, 2008, and April 9, 2008 (the
date he died). The Form W-2 showed $11,000 in
box 1 and $23,000 ($11,000 + $12,000) in boxes
3 and 5. The Form W-2 indicated $845 as fed-
eral income tax withheld in box 2. The estate
received a Form 1099-MISC from the employer
showing $12,000 in box 3. The estate received a
Form 1099-INT for your father showing he was
paid $1,900 interest on his savings account at
the First S&L of Juneville, in 2008, before he
died.
Final Return
for Decedent
From the papers in your father’s files, you deter-
mine that the $11,000 paid to him by his em-
ployer (as shown on the Form W-2), rental
income, and interest are the only items of in-
come he received between January 1 and the
date of his death. You will have to file an income
tax return for him for the period during which he
lived. (You determine that he timely filed his
2007 income tax return before he died.) The final
return is not due until April 15, 2009, the same
date it would have been due had your father
lived during all of 2008.
The check representing unpaid salary and
earned but unused vacation time was not paid to
your father before he died, so the $12,000 is not
reported as income on his final return. It is re-
ported on the income tax return for the estate
(Form 1041) for 2008. The only taxable income
to be reported for your father will be the $11,000
salary (as shown on the Form W-2), the $1,900
interest, and his portion of the rental income that
he received in 2008.
Your father was a cash basis taxpayer and
did not report the interest accrued on the series
EE U.S. savings bonds on prior tax returns that
he filed jointly with your mother. As the personal
representative of your father’s estate, you
choose to report the interest earned on these
bonds before your father’s death ($840) on the
final income tax return.
The rental property was leased the entire
year of 2008 for $1,000 per month. Under local
law, your parents (as joint tenants) each had a
half interest in the income from the property.
Your father’s will, however, stipulates that the
entire rental income is to be paid directly to your
mother. None of the rental income will be re-
ported on the income tax return for the estate.
Instead, your mother will report all the rental
income and expenses on Form 1040. Checking
the records and prior tax returns of your parents,
you find that they previously elected to use the
alternative depreciation system (ADS) with the
mid-month convention. Under ADS, the rental
house is depreciated using the straight-line
method over a 40-year recovery period. They
allocated $15,000 of the cost to the land (which
is never depreciable) and $75,000 to the rental
house. Salvage value was disregarded for the
depreciation computation. Before 2008,
$23,359 had been allowed as depreciation. (For
information on ADS, see Publication 946.)
Deductions. During the year, you received a
bill from the hospital for $615 and bills from your
father’s doctors totaling $475. You paid these
bills as they were presented. In addition, you find
other bills from his doctors totaling $185 that
your father paid in 2008 and receipts for pre-
scribed drugs he purchased totaling $536. The
funeral home presented you a bill for $6,890 for
the expenses of your father’s funeral, which you
paid.
The medical expenses you paid from the
estate’s funds ($615 and $475) were for your
father’s care and were paid within 1 year after
his death. They will not be used to figure the
taxable estate so you can treat them as having
Publication 559 (2008)
10/19/2009 10:15:04 AM

been paid by your father when he received the
medical services. See Medical Expenses under
Final Return for Decedent, earlier. However, you
cannot deduct the funeral expenses either on
your father’s final return or on the estate’s in-
come tax return. They are deductible only on the
federal estate tax return (Form 706).
In addition, after going over other receipts
and canceled checks for the tax year with your
mother, you determine that the following items
are deductible on your parents’ 2008 income tax
return.
Health insurance . . . . . . . . . . .
State income tax paid . . . . . . . .
Real estate tax on home . . . . . . .
Contributions to church . . . . . . .
Rental expenses included real estate taxes
of $700 and mortgage interest of $410. In addi-
tion, insurance premiums of $260 and painting
and repair expenses for $350 were paid. These
rental expenses totaled $1,720.
Your mother and father owned the property
as joint tenants with right of survivorship and
they were the only joint tenants, so her basis in
this property upon your father’s death is
$93,047. This is figured by adding the $60,000
value of the half interest included in your father’s
gross estate to your mother’s $45,000 share of
the cost basis and subtracting your mother’s
$11,953 share of depreciation (including 2008
depreciation for the period before your father’s
death), as explained next.
For 2008, you must make the following com-
putations to figure the depreciation deduction.
1. For the period before your father’s death,
depreciate the property using the same
method, basis, and life used by your par-
ents in previous years. They used the
mid-month convention, so the amount de-
ductible for three and a half months is
$547. (This brings the total depreciation to
$23,906 ($23,359 + $547) at the time of
your father’s death.)
2. For the period after your father’s death,
you must make two computations.
a. Your mother’s cost basis ($45,000) mi-
nus one-half of the amount allocated to
the land ($7,500) is her depreciable ba-
sis ($37,500) for half of the property.
She continues to use the same life and
depreciation method as was originally
used for the property. The amount de-
ductible for the remaining eight and a
half months is $664.
b. The other half of the property must be
depreciated using a depreciation
method that is acceptable for property
placed in service in 2008. You chose to
use ADS with the mid-month conven-
tion. The value included in the estate
($60,000) less the value allocable to the
land ($10,000) is the depreciable basis
($50,000) for this half of the property.
The amount deductible for this half of
the property is $886 ($50,000 ×
.01771). See chapter 4 and Table A-13
in Publication 946.
Show the total of the amounts in (1) and
(2)(a), above, on line 17 of Form 4562, Depreci-
ation and Amortization. Show the amount in
Publication 559 (2008)
1041_Prep_Book_10.indb 197
P U B L I C AT I O N 5 5 9 197
(2)(b) on line 20c. The total depreciation deduc- Deductions. In November 2008, you re-
tion allowed for the year is $2,097. ceived a bill for the real estate taxes on your
parents’ home. The bill was for $2,250, which
Filing status. After December 31, 2008, when
you paid. Include real estate taxes on line 11
your mother determines the amount of her in-
(Form 1041). Real estate tax on the rental prop-
come, you and your mother must decide
erty was $700; this amount, however, is re-
whether you will file a joint return or separate
flected on Schedule E (Form 1040).
returns for your parents for 2008. Your mother
You paid $325 for attorney’s fees in connec-
has rental income and $400 of interest income
tion with administration of the estate. This is an
from her savings account at the Mayflower Bank
expense of administration and is deducted on
of Juneville, so it appears to be to her advantage
line 14 (Form 1041). You must, however, file
to file a joint return.
with the return a statement in duplicate that such
Tax computation. The illustrations of Form expense has not been claimed as a deduction
. . . . $4,250 1040 and related schedules appear near the from the gross estate for figuring the federal
. . . . 891 end of this publication. These illustrations are estate tax on Form 706, and that all rights to
. . . . 2,600 based on information in this example. The tax claim that deduction on Form 706 are waived.
. . . . 3,830
refund is $482. The computation is as follows:
Distributions. You made a distribution of
$2,000 to your father’s brother, James. The dis-
Income:
tribution was made from current income of the
Salary (per Form W-2) . . . . $11,000
Interest income . . . . . . . 3,140 estate under the terms of the will.
Net rental income . . . . . 8,183 The income distribution deduction ($2,000)
Adjusted gross income . . . . $22,323 is figured on Schedule B of Form 1041 and
Minus: Itemized deductions 11,708 deducted on line 18 (Form 1041).
Balance . . . . . . . . . . . . . $10,615 You characterized the $2,000 that is in-
Minus: Exemptions (2) . . 7,000
cluded in income and reported it on Schedule
Taxable income . . . . . . . . $3,615
K-1 (Form 1041) as follows:
Income tax from tax table $363
Minus: Tax withheld . . . . $845 Step 1
Refund of taxes . . . . . . . $482 Allocation of Income & Deductions
Type of Distributable
Income Tax Return Income Amount Deductions Net Income
of an Estate—Form 1041 Interest
(15%) $ 2,250 (386) $ 1,864
The illustrations of Form 1041 and the related Dividends
(5%) 750 (129) 621
schedules for 2008 appear near the end of this
Other
publication. These illustrations are based on the Income
information that follows. (80%) 12,000 (2,060) 9,940
Total $15,000 (2,575) $12,425
2008 income tax return. Having determined
the tax liability for your father’s final return, you
Step 2
now figure the estate’s taxable income. You
Allocation of Distribution
decide to use the calendar year and the cash (Report on the Schedule K-1 for James)
method of accounting to report the estate’s in-
come. This return also is due by April 15, 2009. Line 1 – Interest
In addition to the amount you received from $2,000 × (1,864 ÷ 12,425) ........ $300
your father’s employer for unpaid salary and for Line 2b – Total dividends
vacation pay ($12,000) entered on line 8 (Form $2,000 × (621 ÷ 12,425) . ........ 100
1041), you received a dividend check from the Line 5 – Other income
$2,000 × (9,940 ÷12,425) ........ 1,600
XYZ Company on June 17, 2008. The check
Total Distribution . . . . . . ........ $2,000
was for $750 and you enter it on line 2a (Form
1041). The amount is a qualified dividend and The estate took an income distribution de-
you show the allocation to the beneficiaries and duction, so you must prepare Schedule I (Form
the estate on line 2b. The amount allocated to 1041), Alternative Minimum Tax, regardless of
the beneficiary ($121) is based on the distributa- whether the estate is liable for the alternative
ble dividend income before any deductions. The minimum tax.
estate received a Form 1099-INT showing The other distribution you made out of the
$2,250 interest paid by the bank on the savings assets of the estate in 2008 was the transfer of
account in 2008 after your father died. Show this the automobile to your mother on July 1. This is
amount on line 1 (Form 1041). included in the bequest of property, so it is not
In September, a local coin collector offered taken into account in computing the distributions
you $3,000 for your father’s coin collection. Your of income to the beneficiary. The life insurance
mother was not interested in keeping the collec- proceeds of $275,000 paid directly to your
tion, so you accepted the offer and sold him the mother by the insurance company are not an
collection on September 23, 2008. asset of the estate.
You will have to report the sale on Schedule
D (Form 1041) when you file the income tax Tax computation. The taxable income of
return of the estate. The estate has a capital the estate for 2008 is $10,025, figured as fol-
gain of $200 from the sale of the coins. The gain lows:
is the excess of the sale price, $3,000, over the
Gross income:
value of the collection at the date of your father’s Income in respect of a decedent . . . . $12,000
death, $2,800. See Gain (or loss) from sale of Dividends . . . . . . . . . . . . . . . . . . . 750
property under Income Tax Return of an Es- Interest . . . . . . . . . . . . . . . . . . . . 2,250
tate — Form 1041 and its discussion, Income To Capital gain . . . . . . . . . . . . . . . . . 200
Include, earlier. $15,200
Page 25
10/19/2009 10:15:05 AM
 198 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
Minus: Deductions and income
distribution
Real estate taxes . . . . . . . . $2,250
Attorney’s fee . . . . . . . . . . 325
Exemption . . . . . . . . . . . . 600
Distribution . . . . . . . . . . . . 2,000 5,175
Taxable income . . . . . . . . . . . . . . . $10,025
The estate had a net capital gain, which
includes 28% rate gain, and taxable income, so
you use the Schedule D Tax Worksheet to figure
the tax, $2,418, for 2008.
Note. For purpose of this example, we have
illustrated the filled-in worksheet. You would not
file the worksheet with the return. You would
keep the worksheet for your records.
2009 income tax return for estate. On Janu-
ary 7, 2009, you receive a dividend check from
the XYZ Company for $500. You also have inter-
est posted to the savings account in January
totaling $350. On January 28, 2009, you make a
final accounting to the court and obtain permis-
sion to close the estate. In the accounting, you
Page 26
1041_Prep_Book_10.indb 198
list $1,650 as the balance of the expense of
administering the estate.
You advise the court that you plan to pay
$5,000 to Hometown Church under the provi-
sions of the will, and that you will distribute the
balance of the property to your mother, the re-
maining beneficiary.
Gross income. After making the distribu-
tions already described, you can wind up the
affairs of the estate. The gross income of the
estate for 2009 is more than $600, so you must
file a final income tax return, Form 1041, for
2009 (not shown). The estate’s gross income for
2009 is $850 (dividends $500 and interest
$350).
Deductions. After making the following
computations, you determine that none of the
distributions made to your mother must be in-
cluded in her taxable income for 2009.
Gross income for 2009:
Dividends . . . . . . . . . . . . . . . . . . .
Interest . . . . . . . . . . . . . . . . . . . . 350
$850
Less deductions:
Administration expense . . . . . . . . . . $1,650
Loss . . . . . . . . . . . . . . . . . . . . . . . ($800)
Note that because the contribution of $5,000 to
Hometown Church was not required under the
terms of the will to be paid out of the gross
income of the estate, it is not deductible and was
not included in the computation.
The estate had no distributable net income in
2009, so none of the distributions made to your
mother have to be included in her gross income.
Furthermore, because the estate in the year of
termination had deductions in excess of its
gross income, the excess of $800 will be allowed
as a miscellaneous itemized deduction subject
to the 2%-of-adjusted-gross-income limit to your
mother on her individual return for the year
2009, if she itemizes deductions.
$500
Publication 559 (2008)
10/19/2009 10:15:07 AM
 P U B L I C AT I O N 5 5 9 199

DECEASED John R. Smith -- April 6, 2008

1040
Department of the Treasury—Internal Revenue Service

2008
Form

U.S. Individual Income Tax Return (99) IRS Use Only—Do not write or staple in this space.
For the year Jan. 1–Dec. 31, 2008, or other tax year beginning , 2008, ending , 20 OMB No. 1545-0074
Label Your first name and initial Last name Your social security number
(See L John R. Smith 234 00 7890
instructions A
B If a joint return, spouse’s first name and initial Last name Spouse’s social security number
on page 14.)
E
Use the IRS L Mary L. Smith 567 00 0123
label. Home address (number and street). If you have a P.O. box, see page 14. Apt. no.
Otherwise, H
E 6406 Mayflower St.
 You must enter
your SSN(s) above. 
please print R
or type. E City, town or post office, state, and ZIP code. If you have a foreign address, see page 14.
Checking a box below will not
Presidential Juneville, ME 00000 change your tax or refund.
Election Campaign  Check here if you, or your spouse if filing jointly, want $3 to go to this fund (see page 14)  You Spouse
1 Single 4 Head of household (with qualifying person). (See page 15.) If
Filing Status 2  Married filing jointly (even if only one had income) the qualifying person is a child but not your dependent, enter
Check only 3 Married filing separately. Enter spouse’s SSN above this child’s name here. 
one box. and full name here.  5 Qualifying widow(er) with dependent child (see page 16)


Boxes checked
6a Yourself. If someone can claim you as a dependent, do not check box 6a on 6a and 6b 2
Exemptions b  Spouse No. of children
(3) Dependent’s (4) if qualifying on 6c who:
c Dependents: (2) Dependent’s
relationship to child for child tax ● lived with you
(1) First name Last name social security number
you credit (see page 17) ● did not live with
you due to divorce
or separation
If more than four (see page 18)
dependents, see Dependents on 6c
page 17. not entered above
Add numbers on 2
d Total number of exemptions claimed lines above 

7 Wages, salaries, tips, etc. Attach Form(s) W-2 7 11,000

Income 8a Taxable interest. Attach Schedule B if required 8a 3,140
Attach Form(s) b Tax-exempt interest. Do not include on line 8a 8b
W-2 here. Also 9a Ordinary dividends. Attach Schedule B if required 9a
attach Forms 9b
b Qualified dividends (see page 21)
W-2G and
1099-R if tax 10 Taxable refunds, credits, or offsets of state and local income taxes (see page 22) 10
was withheld. 11 Alimony received 11
12 Business income or (loss). Attach Schedule C or C-EZ 12
13 Capital gain or (loss). Attach Schedule D if required. If not required, check here  13
If you did not 14 Other gains or (losses). Attach Form 4797 14
get a W-2, 15a IRA distributions 15a b Taxable amount (see page 23) 15b
see page 21.
16a Pensions and annuities 16a b Taxable amount (see page 24) 16b
Enclose, but do 17 Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E 17 8,183
not attach, any 18 Farm income or (loss). Attach Schedule F 18
payment. Also, 19
please use 19 Unemployment compensation
Form 1040-V. 20a Social security benefits 20a b Taxable amount (see page 26) 20b
21 Other income. List type and amount (see page 28) 21
22 Add the amounts in the far right column for lines 7 through 21. This is your total income  22 22,323
23 Educator expenses (see page 28) 23
Adjusted 24 Certain business expenses of reservists, performing artists, and
Gross fee-basis government officials. Attach Form 2106 or 2106-EZ 24
Income 25 Health savings account deduction. Attach Form 8889 25
26 Moving expenses. Attach Form 3903 26
27 One-half of self-employment tax. Attach Schedule SE 27
28 Self-employed SEP, SIMPLE, and qualified plans 28
29 Self-employed health insurance deduction (see page 29) 29
30 Penalty on early withdrawal of savings 30
31a Alimony paid b Recipient’s SSN  31a
32 IRA deduction (see page 30) 32
33 Student loan interest deduction (see page 33) 33
34 Tuition and fees deduction. Attach Form 8917 34
35 Domestic production activities deduction. Attach Form 8903 35
36 Add lines 23 through 31a and 32 through 35 36
37 Subtract line 36 from line 22. This is your adjusted gross income  37 22,323
For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see page 88. Cat. No. 11320B Form 1040 (2008)

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Form 1040 (2008) Page 2

Tax 38 Amount from line 37 (adjusted gross income) 38 22,323
and
Credits
39a Check
if:  You were born before January 2, 1944,
Spouse was born before January 2, 1944, 
Blind. Total boxes
Blind. checked  39a
b If your spouse itemizes on a separate return or you were a dual-status alien, see page 34 and check here  39b
Standard c Check if standard deduction includes real estate taxes or disaster loss (see page 34)  39c
Deduction 40 Itemized deductions (from Schedule A) or your standard deduction (see left margin) 40 11,708
for—
41 Subtract line 40 from line 38 41 10,615
● People who
checked any 42 If line 38 is over $119,975, or you provided housing to a Midwestern displaced individual, see
box on line 42 7,000
39a, 39b, or page 36. Otherwise, multiply $3,500 by the total number of exemptions claimed on line 6d
39c or who 43 Taxable income. Subtract line 42 from line 41. If line 42 is more than line 41, enter -0- 43 3,615
can be 363
claimed as a 44 Tax (see page 36). Check if any tax is from: a Form(s) 8814 b Form 4972 44
dependent, 45 Alternative minimum tax (see page 39). Attach Form 6251 45
see page 34.
46 Add lines 44 and 45  46 363
● All others:
Single or 47 Foreign tax credit. Attach Form 1116 if required 47
Married filing 48 Credit for child and dependent care expenses. Attach Form 2441 48
separately,
$5,450 49 Credit for the elderly or the disabled. Attach Schedule R 49
Married filing 50 Education credits. Attach Form 8863 50
jointly or 51 Retirement savings contributions credit. Attach Form 8880 51
Qualifying
widow(er), 52 Child tax credit (see page 42). Attach Form 8901 if required 52
$10,900 53 Credits from Form: a 8396 b 8839 c 5695 53
Head of 54 Other credits from Form: a 3800 b 8801 c 54
household,
$8,000 55 Add lines 47 through 54. These are your total credits 55
56 Subtract line 55 from line 46. If line 55 is more than line 46, enter -0-  56 363
57 Self-employment tax. Attach Schedule SE 57
Other 58
58 Unreported social security and Medicare tax from Form: a 4137 b 8919
Taxes 59
59 Additional tax on IRAs, other qualified retirement plans, etc. Attach Form 5329 if required
60 Additional taxes: a AEIC payments b Household employment taxes. Attach Schedule H 60
61 Add lines 56 through 60. This is your total tax  61 363
Payments 62 Federal income tax withheld from Forms W-2 and 1099 62 845
63 2008 estimated tax payments and amount applied from 2007 return 63
If you have a 64a Earned income credit (EIC) 64a
qualifying
child, attach b Nontaxable combat pay election 64b
Schedule EIC. 65 Excess social security and tier 1 RRTA tax withheld (see page 61) 65
66 Additional child tax credit. Attach Form 8812 66
67 Amount paid with request for extension to file (see page 61) 67
68 Credits from Form: a 2439 b 4136 c 8801 d 8885 68
69 First-time homebuyer credit. Attach Form 5405 69
70 Recovery rebate credit (see worksheet on pages 62 and 63) 70
71 Add lines 62 through 70. These are your total payments  71 845
Refund 72 If line 71 is more than line 61, subtract line 61 from line 71. This is the amount you overpaid 72 482
Direct deposit? 73a Amount of line 72 you want refunded to you. If Form 8888 is attached, check here  73a 482
See page 63  b Routing number  c Type: Checking Savings
and fill in 73b,
 d Account number
73c, and 73d,
or Form 8888. 74 Amount of line 72 you want applied to your 2009 estimated tax  74
Amount 75 Amount you owe. Subtract line 71 from line 61. For details on how to pay, see page 65  75
You Owe 76 Estimated tax penalty (see page 65) 76
Do you want to allow another person to discuss this return with the IRS (see page 66)? Yes. Complete the following. No
Third Party
Designee’s Phone Personal identification
Designee name  no.  ( ) number (PIN) 
Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and
Sign belief, they are true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.
Here


Your signature Date Your occupation Daytime phone number
Joint return?
See page 15. Charles R. Smith, Executor 3-25-09 ( )
Keep a copy Spouse’s signature. If a joint return, both must sign. Date Spouse’s occupation
for your
records. Mary L. Smith 3-25-09
Paid Preparer’s
signature  Date
Check if
self-employed
Preparer’s SSN or PTIN

Preparer’s
Use Only
Firm’s name (or
yours if self-employed),
address, and ZIP code
 EIN
Phone no. ( )
Form 1040 (2008)

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 P U B L I C AT I O N 5 5 9 201

SCHEDULES A&B OMB No. 1545-0074

Schedule A—Itemized Deductions
(Form 1040)
Department of the Treasury
(Schedule B is on back) 2008
Attachment
Internal Revenue Service (99)  Attach to Form 1040.  See Instructions for Schedules A&B (Form 1040). Sequence No. 07
Name(s) shown on Form 1040 Your social security number
John R. (Deceased) & Mary L. Smith 234 00 7890
Medical Caution. Do not include expenses reimbursed or paid by others.
and 1 Medical and dental expenses (see page A-1) 1 6,061
Dental 2 Enter amount from Form 1040, line 38 2 22,323
Expenses 3 Multiply line 2 by 7.5% (.075) 3 1,674
4 Subtract line 3 from line 1. If line 3 is more than line 1, enter -0- 4 4,387
Taxes You 5 State and local (check only one box):
a  Income taxes, or
Paid
(See b General sales taxes
 5 891

page A-2.) 6 Real estate taxes (see page A-5) 6 2,600

7 Personal property taxes 7
8 Other taxes. List type and amount 
8
9 Add lines 5 through 8 9 3,491
Interest 10 Home mortgage interest and points reported to you on Form 1098 10
You Paid 11 Home mortgage interest not reported to you on Form 1098. If paid
(See to the person from whom you bought the home, see page A-6
page A-5.) and show that person’s name, identifying no., and address 

Note. 11
Personal
12 Points not reported to you on Form 1098. See page A-6
interest is
for special rules 12
not
deductible. 13 Qualified mortgage insurance premiums (see page A-6) 13
14 Investment interest. Attach Form 4952 if required. (See
page A-6.) 14
15 Add lines 10 through 14 15
Gifts to 16 Gifts by cash or check. If you made any gift of $250 or
Charity more, see page A-7 16 3,830
If you made a 17 Other than by cash or check. If any gift of $250 or more,
gift and got a see page A-8. You must attach Form 8283 if over $500 17
benefit for it, 18 18
Carryover from prior year
see page A-7.
19 Add lines 16 through 18 19 3,830
Casualty and
Theft Losses 20 Casualty or theft loss(es). Attach Form 4684. (See page A-8.) 20
Job Expenses 21 Unreimbursed employee expenses—job travel, union dues, job
and Certain education, etc. Attach Form 2106 or 2106-EZ if required. (See page
Miscellaneous A-9.)  21
Deductions 22 Tax preparation fees 22
(See 23 Other expenses—investment, safe deposit box, etc. List type and
page A-9.) amount 
23
24 Add lines 21 through 23 24
25 Enter amount from Form 1040, line 38 25
26 Multiply line 25 by 2% (.02) 26
27 Subtract line 26 from line 24. If line 26 is more than line 24, enter -0- 27
Other 28 Other—from list on page A-10. List type and amount 
Miscellaneous
Deductions 28
Total 29 Is Form 1040, line 38, over $159,950 (over $79,975 if married filing separately)?
 No. Your deduction is not limited. Add the amounts in the far right column for


Itemized
Deductions lines 4 through 28. Also, enter this amount on Form 1040, line 40.  29 11,708
Yes. Your deduction may be limited. See page A-10 for the amount to enter.
30 If you elect to itemize deductions even though they are less than your standard
deduction, check here 

For Paperwork Reduction Act Notice, see Form 1040 instructions. Cat. No. 11330X Schedule A (Form 1040) 2008

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Schedules A&B (Form 1040) 2008 OMB No. 1545-0074 Page 2

Name(s) shown on Form 1040. Do not enter name and social security number if shown on other side. Your social security number

Attachment
Schedule B—Interest and Ordinary Dividends Sequence No. 08
Amount
1 List name of payer. If any interest is from a seller-financed mortgage and the
Part I buyer used the property as a personal residence, see page B-1 and list this
Interest interest first. Also, show that buyer’s social security number and address 
(See page B-1
and the
instructions for First S&L of Juneville 1,900
Form 1040,
line 8a.)
Mayflower Bank of Juneville 400
1
Series EE U.S. Savings Bonds -- Interest
Note. If you includible Before Decedent’s Death 840
received a Form
1099-INT, Form
1099-OID, or
substitute
statement from
a brokerage firm,
list the firm’s
name as the
payer and enter
the total interest
shown on that 2 Add the amounts on line 1 2 3,140
form.
3 Excludable interest on series EE and I U.S. savings bonds issued after 1989.
Attach Form 8815 3 -0-
4 Subtract line 3 from line 2. Enter the result here and on Form 1040, line 8a  4 3,140
Note. If line 4 is over $1,500, you must complete Part III. Amount
5 List name of payer 
Part II
Ordinary
Dividends
(See page B-1
and the
instructions for
Form 1040,
line 9a.)

Note. If you 5
received a Form
1099-DIV or
substitute
statement from
a brokerage firm,
list the firm’s
name as the
payer and enter
the ordinary
dividends shown
on that form.

6 Add the amounts on line 5. Enter the total here and on Form 1040, line 9a  6
Note. If line 6 is over $1,500, you must complete Part III.
You must complete this part if you (a) had over $1,500 of taxable interest or ordinary dividends; or (b) had Yes No
Part III a foreign account; or (c) received a distribution from, or were a grantor of, or a transferor to, a foreign trust.
Foreign 7a At any time during 2008, did you have an interest in or a signature or other authority over a financial
Accounts account in a foreign country, such as a bank account, securities account, or other financial account?
See page B-2 for exceptions and filing requirements for Form TD F 90-22.1 
and Trusts
b If “Yes,” enter the name of the foreign country 
(See
page B-2.) 8 During 2008, did you receive a distribution from, or were you the grantor of, or transferor to, a
foreign trust? If “Yes,” you may have to file Form 3520. See page B-2 
For Paperwork Reduction Act Notice, see Form 1040 instructions. Schedule B (Form 1040) 2008

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 P U B L I C AT I O N 5 5 9 203

SCHEDULE E OMB No. 1545-0074

Supplemental Income and Loss
(Form 1040)
Department of the Treasury
(From rental real estate, royalties, partnerships,
S corporations, estates, trusts, REMICs, etc.) 2008
Attachment
 
Internal Revenue Service (99) Attach to Form 1040, 1040NR, or Form 1041. See Instructions for Schedule E (Form 1040). Sequence No. 13
Name(s) shown on return Your social security number
John R. (Deceased) & Mary L. Smith 234 00 7890
Part I Income or Loss From Rental Real Estate and Royalties Note. If you are in the business of renting personal property, use
Schedule C or C-EZ (see page E-3). If you are an individual, report farm rental income or loss from Form 4835 on page 2, line 40.
1 List the type and address of each rental real estate property: 2 For each rental real estate property Yes No
House, 137 Main Street listed on line 1, did you or your family
A use it during the tax year for personal
Juneville, ME 00000 purposes for more than the greater of: A 
B ● 14 days or
● 10% of the total days rented at B
C fair rental value?
(See page E-3) C
Properties Totals
Income: (Add columns A, B, and C.)
A B C
3 Rents received 3 12,000 3 12,000
4 Royalties received 4 4
Expenses:
5 Advertising 5
6 Auto and travel (see page E-4) 6
7 Cleaning and maintenance 7
8 Commissions 8
9 Insurance 9 260
10 Legal and other professional fees 10
11 Management fees 11
12 Mortgage interest paid to banks,
etc. (see page E-5) 12 410 12 410
13 Other interest 13
14 Repairs 14 350
15 Supplies 15
16 Taxes 16 700
17 Utilities 17
18 Other (list) 

18

19 Add lines 5 through 18 19 1,720 19 1,720

20 Depreciation expense or depletion
(see page E-5) 20 2,097 20 2,097
21 Total expenses. Add lines 19 and 20 21 3,817
22 Income or (loss) from rental real
estate or royalty properties.
Subtract line 21 from line 3 (rents)
or line 4 (royalties). If the result is a
(loss), see page E-5 to find out if
you must file Form 6198 22 8,183
23 Deductible rental real estate loss.
Caution. Your rental real estate
loss on line 22 may be limited. See
page E-5 to find out if you must
f i l e Form 8582. Real estate
professionals must complete line
43 on page 2 23 ( ) ( ) ( )
24 Income. Add positive amounts shown on line 22. Do not include any losses 24 8,183
25 Losses. Add royalty losses from line 22 and rental real estate losses from line 23. Enter total losses here. 25 ( )
26 Total rental real estate and royalty income or (loss). Combine lines 24 and 25. Enter the result here.
If Parts II, III, IV, and line 40 on page 2 do not apply to you, also enter this amount on Form 1040,
line 17, or Form 1040NR, line 18. Otherwise, include this amount in the total on line 41 on page 2 26 8,183
For Paperwork Reduction Act Notice, see page E-8 of the instructions. Cat. No. 11344L Schedule E (Form 1040) 2008

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Depreciation and Amortization

Form 4562 (Including Information on Listed Property)
OMB No. 1545-0172

2008
Department of the Treasury
Internal Revenue Service
Attachment
(99)  See separate instructions.  Attach to your tax return. Sequence No. 67
Name(s) shown on return Business or activity to which this form relates Identifying number
John R. (Deceased) & Mary L. Smith 234-00-7890
Part I Election To Expense Certain Property Under Section 179
Note: If you have any listed property, complete Part V before you complete Part I.
1 Maximum amount. See the instructions for a higher limit for certain businesses 1 $250,000
2 Total cost of section 179 property placed in service (see instructions) 2
3 Threshold cost of section 179 property before reduction in limitation (see instructions) 3 $800,000
4 Reduction in limitation. Subtract line 3 from line 2. If zero or less, enter -0- 4
5 Dollar limitation for tax year. Subtract line 4 from line 1. If zero or less, enter -0-. If married filing
separately, see instructions 5
(a) Description of property (b) Cost (business use only) (c) Elected cost

7 Listed property. Enter the amount from line 29 7

8 Total elected cost of section 179 property. Add amounts in column (c), lines 6 and 7 8
9 Tentative deduction. Enter the smaller of line 5 or line 8 9
10 Carryover of disallowed deduction from line 13 of your 2007 Form 4562 10
11 Business income limitation. Enter the smaller of business income (not less than zero) or line 5 (see instructions) 11
12 Section 179 expense deduction. Add lines 9 and 10, but do not enter more than line 11 12
13 Carryover of disallowed deduction to 2009. Add lines 9 and 10, less line 12  13
Note: Do not use Part II or Part III below for listed property. Instead, use Part V.
Part II Special Depreciation Allowance and Other Depreciation (Do not include listed property.) (See instructions.)
14 Special depreciation allowance for qualified property (other than listed property) placed in service
during the tax year (see instructions) 14
15 Property subject to section 168(f)(1) election 15
16 Other depreciation (including ACRS) 16
Part III MACRS Depreciation (Do not include listed property.) (See instructions.)
Section A
17 MACRS deductions for assets placed in service in tax years beginning before 2008 17 1,211
18 If you are electing to group any assets placed in service during the tax year into one or more
general asset accounts, check here 
Section B—Assets Placed in Service During 2008 Tax Year Using the General Depreciation System
(b) Month and (c) Basis for depreciation
(d) Recovery
(a) Classification of property year placed in (business/investment use (e) Convention (f) Method (g) Depreciation deduction
period
service only—see instructions)
19a 3-year property
b 5-year property
c 7-year property
d 10-year property
e 15-year property
f 20-year property
g 25-year property 25 yrs. S/L
h Residential rental 27.5 yrs. MM S/L
property 27.5 yrs. MM S/L
i Nonresidential real 39 yrs. MM S/L
property MM S/L
Section C—Assets Placed in Service During 2008 Tax Year Using the Alternative Depreciation System
20a Class life S/L
b 12-year 12 yrs. S/L
c 40-year 7-94 50,000 40 yrs. MM S/L 886
Part IV Summary (See instructions.)
21 Listed property. Enter amount from line 28 21
22 Total. Add amounts from line 12, lines 14 through 17, lines 19 and 20 in column (g), and line 21.
Enter here and on the appropriate lines of your return. Partnerships and S corporations—see instr. 22 2,097
23 For assets shown above and placed in service during the current year,
enter the portion of the basis attributable to section 263A costs 23
For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 12906N Form 4562 (2008)

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 P U B L I C AT I O N 5 5 9 205

Form 1041 (2004) Page 2

Schedule A Charitable Deduction. Do not complete for a simple trust or a pooled income fund.
1 Amounts paid or permanently set aside for charitable purposes from gross income (see page 20) 1
2 Tax-exempt income allocable to charitable contributions (see page 20 of the instructions) 2
3 Subtract line 2 from line 1 3
4 Capital gains for the tax year allocated to corpus and paid or permanently set aside for charitable purposes 4
5 Add lines 3 and 4 5
6 Section 1202 exclusion allocable to capital gains paid or permanently set aside for charitable
purposes (see page 20 of the instructions) 6
7 Charitable deduction. Subtract line 6 from line 5. Enter here and on page 1, line 13 7
Schedule B Income Distribution Deduction
1 Adjusted total income (see page 21 of the instructions) 1 12,625
2 Adjusted tax-exempt interest 2
3 Total net gain from Schedule D (Form 1041), line 15, column (1) (see page 21 of the instructions) 3
4 Enter amount from Schedule A, line 4 (reduced by any allocable section 1202 exclusion) 4
5 Capital gains for the tax year included on Schedule A, line 1 (see page 21 of the instructions) 5
6 Enter any gain from page 1, line 4, as a negative number. If page 1, line 4, is a loss, enter the
loss as a positive number 6 (200)
7 Distributable net income (DNI). Combine lines 1 through 6. If zero or less, enter -0- 7 12,425
8 If a complex trust, enter accounting income for the tax year as
determined under the governing instrument and applicable local law 8
9 Income required to be distributed currently 9
10 Other amounts paid, credited, or otherwise required to be distributed 10 2,000
11 Total distributions. Add lines 9 and 10. If greater than line 8, see page 22 of the instructions 11 2,000
12 Enter the amount of tax-exempt income included on line 11 12
13 Tentative income distribution deduction. Subtract line 12 from line 11 13 2,000
14 Tentative income distribution deduction. Subtract line 2 from line 7. If zero or less, enter -0- 14 12,425
15 Income distribution deduction. Enter the smaller of line 13 or line 14 here and on page 1, line 18 15 2,000
Schedule G Tax Computation (see page 22 of the instructions)
1 Tax: a Tax on taxable income (see page 22 of the instructions) 1a 2,502
b Tax on lump-sum distributions (attach Form 4972) 1b
c Alternative minimum tax (from Schedule I, line 56) 1c
d Total. Add lines 1a through 1c 䊳 1d 2,502
2a Foreign tax credit (attach Form 1116) 2a
b Other nonbusiness credits (attach schedule) 2b
c General business credit. Enter here and check which forms are attached:
Form 3800 Forms (specify) 䊳 2c
d Credit for prior year minimum tax (attach Form 8801) 2d
3 Total credits. Add lines 2a through 2d 䊳 3
4 Subtract line 3 from line 1d. If zero or less, enter -0- 4 2,502
5 Recapture taxes. Check if from: Form 4255 Form 8611 5 -0-
6 Household employment taxes. Attach Schedule H (Form 1040) 6
7 Total tax. Add lines 4 through 6. Enter here and on page 1, line 23 䊳
2,502 7
Other Information Yes No
1 Did the estate or trust receive tax-exempt income? If “Yes,” attach a computation of the allocation of expenses ⻫
Enter the amount of tax-exempt interest income and exempt-interest dividends 䊳 $
2 Did the estate or trust receive all or any part of the earnings (salary, wages, and other compensation) of any
individual by reason of a contract assignment or similar arrangement? ⻫
3 At any time during calendar year 2004, did the estate or trust have an interest in or a signature or other authority
over a bank, securities, or other financial account in a foreign country?
⻫
See page 24 of the instructions for exceptions and filing requirements for Form TD F 90-22.1. If “Yes,” enter
the name of the foreign country 䊳
4 During the tax year, did the estate or trust receive a distribution from, or was it the grantor of, or transferor to,
⻫
a foreign trust? If “Yes,” the estate or trust may have to file Form 3520. See page 24 of the instructions
5 Did the estate or trust receive, or pay, any qualified residence interest on seller-provided financing? If “Yes,”
⻫
see page 24 for required attachment
6 If this is an estate or a complex trust making the section 663(b) election, check here (see page 24) 䊳
7 To make a section 643(e)(3) election, attach Schedule D (Form 1041), and check here (see page 24) 䊳
8 If the decedent’s estate has been open for more than 2 years, attach an explanation for the delay in closing the estate, and check here 䊳
9 Are any present or future trust beneficiaries skip persons? See page 24 of the instructions ⻫
Form 1041 (2004)

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 206 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E

Form 1041 (2008) Page 2

Schedule A Charitable Deduction. Do not complete for a simple trust or a pooled income fund.
1 Amounts paid or permanently set aside for charitable purposes from gross income (see page 25) 1
2 Tax-exempt income allocable to charitable contributions (see page 25 of the instructions) 2
3 Subtract line 2 from line 1 3
4 Capital gains for the tax year allocated to corpus and paid or permanently set aside for charitable purposes 4
5 Add lines 3 and 4 5
6 Section 1202 exclusion allocable to capital gains paid or permanently set aside for charitable
purposes (see page 25 of the instructions) 6
7 Charitable deduction. Subtract line 6 from line 5. Enter here and on page 1, line 13 7
Schedule B Income Distribution Deduction
1 Adjusted total income (see page 26 of the instructions) 1 12,625
2 Adjusted tax-exempt interest 2
3 Total net gain from Schedule D (Form 1041), line 15, column (1) (see page 26 of the instructions) 3
4 Enter amount from Schedule A, line 4 (minus any allocable section 1202 exclusion) 4
5 Capital gains for the tax year included on Schedule A, line 1 (see page 26 of the instructions) 5
6 Enter any gain from page 1, line 4, as a negative number. If page 1, line 4, is a loss, enter the
loss as a positive number 6 (200)
7 Distributable net income. Combine lines 1 through 6. If zero or less, enter -0- 7 12,425
8 If a complex trust, enter accounting income for the tax year as
determined under the governing instrument and applicable local law 8
9 Income required to be distributed currently 9
10 Other amounts paid, credited, or otherwise required to be distributed 10 2,000
11 Total distributions. Add lines 9 and 10. If greater than line 8, see page 26 of the instructions 11 2,000
12 Enter the amount of tax-exempt income included on line 11 12
13 Tentative income distribution deduction. Subtract line 12 from line 11 13 2,000
14 Tentative income distribution deduction. Subtract line 2 from line 7. If zero or less, enter -0- 14 12,425
15 Income distribution deduction. Enter the smaller of line 13 or line 14 here and on page 1, line 18 15 2,000
Schedule G Tax Computation (see page 27 of the instructions)
1 Tax: a Tax on taxable income (see page 27 of the instructions) 1a 2,418
b Tax on lump-sum distributions. Attach Form 4972 1b
c Alternative minimum tax (from Schedule I (Form 1041), line 56) 1c -0-
d Total. Add lines 1a through 1c  1d 2,418
2a Foreign tax credit. Attach Form 1116 2a
b Other nonbusiness credits (attach schedule) 2b
c General business credit. Attach Form 3800 2c
d Credit for prior year minimum tax. Attach Form 8801 2d
3 Total credits. Add lines 2a through 2d  3
4 Subtract line 3 from line 1d. If zero or less, enter -0-. 4
5 Recapture taxes. Check if from: Form 4255 Form 8611 2,418 5
6 Household employment taxes. Attach Schedule H (Form 1040) -0- 6
7 Total tax. Add lines 4 through 6. Enter here and on page 1, line 23  2,418 7
Other Information Yes No
1 Did the estate or trust receive tax-exempt income? If “Yes,” attach a computation of the allocation of expenses 
Enter the amount of tax-exempt interest income and exempt-interest dividends  $
2 Did the estate or trust receive all or any part of the earnings (salary, wages, and other compensation) of any
individual by reason of a contract assignment or similar arrangement? 
3 At any time during calendar year 2008, did the estate or trust have an interest in or a signature or other authority
over a bank, securities, or other financial account in a foreign country? 
See page 29 of the instructions for exceptions and filing requirements for Form TD F 90-22.1. If “Yes,” enter
the name of the foreign country 
4 During the tax year, did the estate or trust receive a distribution from, or was it the grantor of, or transferor to,
a foreign trust? If “Yes,” the estate or trust may have to file Form 3520. See page 29 of the instructions 
5 Did the estate or trust receive, or pay, any qualified residence interest on seller-provided financing? If “Yes,”
see page 30 for required attachment 
6 If this is an estate or a complex trust making the section 663(b) election, check here (see page 30) 
7 To make a section 643(e)(3) election, attach Schedule D (Form 1041), and check here (see page 30) 
8 If the decedent’s estate has been open for more than 2 years, attach an explanation for the delay in closing the estate, and check here 
9 Are any present or future trust beneficiaries skip persons? See page 30 of the instructions 
Form 1041 (2008)

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SCHEDULE I OMB No. 1545-0092

(Form 1041)
Alternative Minimum Tax—Estates and Trusts
Department of the Treasury
Internal Revenue Service
 Attach to Form 1041. See the separate instructions
for Schedule I (Form 1041). 2008
Name of estate or trust Employer identification number
Estate of John R. Smith 10 0123456
Part I Estate’s or Trust’s Share of Alternative Minimum Taxable Income
1 Adjusted total income or (loss) (from Form 1041, line 17) 1 12,625
2 Interest 2
3 Taxes 3 2,250
4 Miscellaneous itemized deductions (from Form 1041, line 15b) 4
5 Refund of taxes 5 ( )
6 Depletion (difference between regular tax and AMT) 6
7 Net operating loss deduction. Enter as a positive amount 7
8 Interest from specified private activity bonds exempt from the regular tax 8
9 Qualified small business stock (see page 2 of the instructions) 9
10 Exercise of incentive stock options (excess of AMT income over regular tax income) 10
11 Other estates and trusts (amount from Schedule K-1 (Form 1041), box 12, code A) 11
12 Electing large partnerships (amount from Schedule K-1 (Form 1065-B), box 6) 12
13 Disposition of property (difference between AMT and regular tax gain or loss) 13
14 Depreciation on assets placed in service after 1986 (difference between regular tax and AMT) 14
15 Passive activities (difference between AMT and regular tax income or loss) 15
16 Loss limitations (difference between AMT and regular tax income or loss) 16
17 Circulation costs (difference between regular tax and AMT) 17
18 Long-term contracts (difference between AMT and regular tax income) 18
19 Mining costs (difference between regular tax and AMT) 19
20 Research and experimental costs (difference between regular tax and AMT) 20
21 Income from certain installment sales before January 1, 1987 21 ( )
22 Intangible drilling costs preference 22
23 Other adjustments, including income-based related adjustments 23
24 Alternative tax net operating loss deduction (See the instructions for the limitation that applies.) 24 ( )
25 Adjusted alternative minimum taxable income. Combine lines 1 through 24 25 14,875
Note: Complete Part II below before going to line 26.
26 Income distribution deduction from Part II, line 44 26 2,000
27 Estate tax deduction (from Form 1041, line 19) 27
28 Add lines 26 and 27 28 2,000
29 Estate’s or trust’s share of alternative minimum taxable income. Subtract line 28 from line 25 29 12,875
If line 29 is:
● $22,500 or less, stop here and enter -0- on Form 1041, Schedule G, line 1c. The estate or
trust is not liable for the alternative minimum tax.
● Over $22,500, but less than $165,000, go to line 45.
● $165,000 or more, enter the amount from line 29 on line 51 and go to line 52.
Part II Income Distribution Deduction on a Minimum Tax Basis
30 Adjusted alternative minimum taxable income (see page 6 of the instructions) 30 14,875
31 Adjusted tax-exempt interest (other than amounts included on line 8) 31
32 Total net gain from Schedule D (Form 1041), line 15, column (1). If a loss, enter -0- 32
33 Capital gains for the tax year allocated to corpus and paid or permanently set aside for charitable
purposes (from Form 1041, Schedule A, line 4) 33
34 Capital gains paid or permanently set aside for charitable purposes from gross income (see page
6 of the instructions) 34
35 Capital gains computed on a minimum tax basis included on line 25 35 ( 200 )
36 Capital losses computed on a minimum tax basis included on line 25. Enter as a positive amount 36
37 Distributable net alternative minimum taxable income (DNAMTI). Combine lines 30 through 36.
If zero or less, enter -0- 37 14,675
38 Income required to be distributed currently (from Form 1041, Schedule B, line 9) 38
39 Other amounts paid, credited, or otherwise required to be distributed (from Form 1041, Schedule B, line 10) 39 2,000
40 Total distributions. Add lines 38 and 39 40 2,000
41 Tax-exempt income included on line 40 (other than amounts included on line 8) 41
42 Tentative income distribution deduction on a minimum tax basis. Subtract line 41 from line 40 42 2,000
For Privacy Act and Paperwork Reduction Act Notice, see the Instructions for Form 1041. Cat. No. 51517Q Schedule I (Form 1041) (2008)

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Schedule I (Form 1041) (2008) Page 2

Part II Income Distribution Deduction on a Minimum Tax Basis (continued)
43 Tentative income distribution deduction on a minimum tax basis. Subtract line 31 from line 37.
If zero or less, enter -0- 43 14,675
44 Income distribution deduction on a minimum tax basis. Enter the smaller of line 42 or
line 43. Enter here and on line 26 44 2,000
Part III Alternative Minimum Tax
45 Exemption amount 45 $22,500 00
46 Enter the amount from line 29 46
47 Phase-out of exemption amount 47 $75,000 00
48 Subtract line 47 from line 46. If zero or less, enter -0- 48
49 Multiply line 48 by 25% (.25) 49
50 Subtract line 49 from line 45. If zero or less, enter -0- 50
51 Subtract line 50 from line 46 51
52 Go to Part IV of Schedule I to figure line 52 if the estate or trust has qualified dividends or has
a gain on lines 14a and 15 of column (2) of Schedule D (Form 1041) (as refigured for the AMT,
if necessary). Otherwise, if line 51 is—
● $175,000 or less, multiply line 51 by 26% (.26).
● Over $175,000, multiply line 51 by 28% (.28) and subtract $3,500 from the result 52
53 Alternative minimum foreign tax credit (see page 7 of the instructions) 53
54 Tentative minimum tax. Subtract line 53 from line 52 54
55 Enter the tax from Form 1041, Schedule G, line 1a (minus any foreign tax credit from Schedule G, line 2a) 55
56 Alternative minimum tax. Subtract line 55 from line 54. If zero or less, enter -0-. Enter here and
on Form 1041, Schedule G, line 1c 56
Part IV Line 52 Computation Using Maximum Capital Gains Rates
Caution: If you did not complete Part V of Schedule D (Form 1041), the Schedule D Tax Worksheet,
or the Qualified Dividends Tax Worksheet, see page 8 of the instructions before completing this part.
57 Enter the amount from line 51 57
58 Enter the amount from Schedule D (Form 1041), line 22, line 13 of the
Schedule D Tax Worksheet, or line 4 of the Qualified Dividends Tax
Worksheet, whichever applies (as refigured for the AMT, if necessary) 58
59 Enter the amount from Schedule D (Form 1041), line 14b, column (2)
(as refigured for the AMT, if necessary). If you did not complete
Schedule D for the regular tax or the AMT, enter -0- 59
60 If you did not complete a Schedule D Tax Worksheet for the regular tax
or the AMT, enter the amount from line 58. Otherwise, add lines 58 and
59 and enter the smaller of that result or the amount from line 10 of
the Schedule D Tax Worksheet (as refigured for the AMT, if necessary) 60
61 Enter the smaller of line 57 or line 60 61
62 Subtract line 61 from line 57 62
63 If line 62 is $175,000 or less, multiply line 62 by 26% (.26). Otherwise, multiply line 62 by
28% (.28) and subtract $3,500 from the result  63
64 Maximum amount subject to the 0% rate 64 $2,200 00
65 Enter the amount from line 23 of Schedule D (Form 1041), line 14 of the
Schedule D Tax Worksheet, or line 5 of the Qualified Dividends Tax
Worksheet on page 27 of the Instructions for Form 1041, whichever applies
(as figured for the regular tax). If you did not complete Schedule D or
either worksheet for the regular tax, enter -0- 65
66 Subtract line 65 from line 64. If zero or less, enter -0- 66
67 Enter the smaller of line 57 or line 58 67
68 Enter the smaller of line 66 or line 67 68
69 Subtract line 68 from line 67 69
70 Multiply line 69 by 15% (.15)  70
If line 59 is zero or blank, skip lines 71 and 72 and go to line 73. Otherwise, go to line 71.
71 Subtract line 67 from line 61 71
72 Multiply line 71 by 25% (.25)  72
73 Add lines 63, 70, and 72 73
74 If line 57 is $175,000 or less, multiply line 57 by 26% (.26). Otherwise, multiply line 57 by
28% (.28) and subtract $3,500 from the result 74
75 Enter the smaller of line 73 or line 74 here and on line 52 75
Schedule I (Form 1041) (2008)

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OMB No. 1545-0092

SCHEDULE D
(Form 1041) Capital Gains and Losses
Department of the Treasury
Internal Revenue Service
 Attach to Form 1041, Form 5227, or Form 990-T. See the separate
instructions for Form 1041 (also for Form 5227 or Form 990-T, if applicable).
2008
Name of estate or trust Employer identification number
Estate of John R. Smith 10 0123456
Note: Form 5227 filers need to complete only Parts I and II.
Part I Short-Term Capital Gains and Losses—Assets Held One Year or Less
(e) Cost or other basis (f) Gain or (loss) for
(a) Description of property (b) Date acquired (c) Date sold (see page 4 of the the entire year
(d) Sales price
(Example: 100 shares 7% preferred of “Z” Co.) (mo., day, yr.) (mo., day, yr.) instructions) Subtract (e) from (d)
1a

b Enter the short-term gain or (loss), if any, from Schedule D-1, line 1b 1b

2 Short-term capital gain or (loss) from Forms 4684, 6252, 6781, and 8824 2

3 Net short-term gain or (loss) from partnerships, S corporations, and other estates or trusts 3
4 Short-term capital loss carryover. Enter the amount, if any, from line 9 of the 2007 Capital Loss
Carryover Worksheet 4 ( )
5 Net short-term gain or (loss). Combine lines 1a through 4 in column (f). Enter here and on line 13,
column (3) on the back  5
Part II Long-Term Capital Gains and Losses—Assets Held More Than One Year
(e) Cost or other basis (f) Gain or (loss) for
(a) Description of property (b) Date acquired (c) Date sold (d) Sales price (see page 4 of the the entire year
(Example: 100 shares 7% preferred of “Z” Co.) (mo., day, yr.) (mo., day, yr.) instructions) Subtract (e) from (d)
6a
Coin Collection 4-9-08 9-23-08 3,000 2,800 200

b Enter the long-term gain or (loss), if any, from Schedule D-1, line 6b 6b

7 Long-term capital gain or (loss) from Forms 2439, 4684, 6252, 6781, and 8824 7

8 Net long-term gain or (loss) from partnerships, S corporations, and other estates or trusts 8

9 Capital gain distributions 9

10 Gain from Form 4797, Part I 10

11 Long-term capital loss carryover. Enter the amount, if any, from line 14 of the 2007 Capital Loss
Carryover Worksheet 11 ( )
12 Net long-term gain or (loss). Combine lines 6a through 11 in column (f). Enter here and on line 14a,
column (3) on the back  12 200
For Paperwork Reduction Act Notice, see the Instructions for Form 1041. Cat. No. 11376V Schedule D (Form 1041) 2008

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Schedule D (Form 1041) 2008 Page 2

Part III Summary of Parts I and II (1) Beneficiaries’ (2) Estate’s
(3) Total
Caution: Read the instructions before completing this part. (see page 5) or trust’s
13 Net short-term gain or (loss) 13
14 Net long-term gain or (loss):
a Total for year 14a 200 200
b Unrecaptured section 1250 gain (see line 18 of the wrksht.) 14b
c 28% rate gain 14c 200 200
15 Total net gain or (loss). Combine lines 13 and 14a  15 200 200
Note: If line 15, column (3), is a net gain, enter the gain on Form 1041, line 4 (or Form 990-T, Part I, line 4a). If lines 14a and 15, column (2), are
net gains, go to Part V, and do not complete Part IV. If line 15, column (3), is a net loss, complete Part IV and the Capital Loss Carryover
Worksheet, as necessary.
Part IV Capital Loss Limitation
16 Enter here and enter as a (loss) on Form 1041, line 4 (or Form 990-T, Part I, line 4c, if a trust), the smaller of:
a The loss on line 15, column (3) or b $3,000 16 ( )
Note: If the loss on line 15, column (3), is more than $3,000, or if Form 1041, page 1, line 22 (or Form 990-T, line 34), is a loss, complete the Capital
Loss Carryover Worksheet on page 7 of the instructions to figure your capital loss carryover.
Part V Tax Computation Using Maximum Capital Gains Rates
Form 1041 filers. Complete this part only if both lines 14a and 15 in column (2) are gains, or an amount is entered in Part I or Part II and there is an
entry on Form 1041, line 2b(2), and Form 1041, line 22, is more than zero.
Caution: Skip this part and complete the worksheet on page 8 of the instructions if:
● Either line 14b, col. (2) or line 14c, col. (2) is more than zero, or
● Both Form 1041, line 2b(1), and Form 4952, line 4g are more than zero.
Form 990-T trusts. Complete this part only if both lines 14a and 15 are gains, or qualified dividends are included in income in Part I of Form 990-T,
and Form 990-T, line 34, is more than zero. Skip this part and complete the worksheet on page 8 of the instructions if either line 14b, col. (2) or line
14c, col. (2) is more than zero.
17 Enter taxable income from Form 1041, line 22 (or Form 990-T, line 34) 17
18 Enter the smaller of line 14a or 15 in column (2)
but not less than zero 18
19 Enter the estate’s or trust’s qualified dividends from
Form 1041, line 2b(2) (or enter the qualified dividends
included in income in Part I of Form 990-T) 19
20 Add lines 18 and 19 20
21 If the estate or trust is filing Form 4952, enter the
amount from line 4g; otherwise, enter -0-  21
22 Subtract line 21 from line 20. If zero or less, enter -0- 22
23 Subtract line 22 from line 17. If zero or less, enter -0- 23

24 Enter the smaller of the amount on line 17 or $2,200 24

25 Is the amount on line 23 equal to or more than the amount on line 24?
Yes. Skip lines 25 and 26; go to line 27 and check the “No” box.
No. Enter the amount from line 23 25
26 Subtract line 25 from line 24 26
27 Are the amounts on lines 22 and 26 the same?
Yes. Skip lines 27 thru 30; go to line 31. No. Enter the smaller of line 17 or line 22 27

28 Enter the amount from line 26 (If line 26 is blank, enter -0-) 28

29 Subtract line 28 from line 27 29

30 Multiply line 29 by 15% (.15) 30
31 Figure the tax on the amount on line 23. Use the 2008 Tax Rate Schedule for Estates and Trusts (see
the Schedule G instructions) 31

32 Add lines 30 and 31 32

33 Figure the tax on the amount on line 17. Use the 2008 Tax Rate Schedule for Estates and Trusts (see
the Schedule G instructions) 33
34 Tax on all taxable income. Enter the smaller of line 32 or line 33 here and on line 1a of
Schedule G, Form 1041 (or line 36 of Form 990-T) 34
Schedule D (Form 1041) 2008

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661108
Final K-1 Amended K-1 OMB No. 1545-0092
Schedule K-1
(Form 1041) 2008 Part III Beneficiary’s Share of Current Year Income,
Deductions, Credits, and Other Items
Department of the Treasury 1 Interest income 11 Final year deductions
Internal Revenue Service For calendar year 2008,
or tax year beginning , 2008, 300
2a Ordinary dividends
and ending , 20
100
2b Qualified dividends
Beneficiary’s Share of Income, Deductions,
Credits, etc.  See back of form and instructions. 100
3 Net short-term capital gain
Part I Information About the Estate or Trust
A Estate’s or trust’s employer identification number 4a Net long-term capital gain

10-0123456 4b 28% rate gain 12 Alternative minimum tax adjustment

B Estate’s or trust’s name
4c Unrecaptured section 1250 gain

Estate of John R. Smith

Other portfolio and
5
nonbusiness income
C Fiduciary’s name, address, city, state, and ZIP code 1,600
6 Ordinary business income

Charles R. Smith, Executor 7 Net rental real estate income

6406 Mayflower Street 13 Credits and credit recapture
Juneville, ME 00000
8 Other rental income

9 Directly apportioned deductions

D Check if Form 1041-T was filed and enter the date it was filed
/ / 14 Other information

E Check if this is the final Form 1041 for the estate or trust
10 Estate tax deduction
Part II Information About the Beneficiary
F Beneficiary’s identifying number
123-00-6789
G Beneficiary’s name, address, city, state, and ZIP code

James Smith
6407 Mayflower Street
*See attached statement for additional information.
Juneville, ME 00000
Note. A statement must be attached showing the
beneficiary’s share of income and directly apportioned
deductions from each business, rental real estate, and
other rental activity.
For IRS Use Only

H  Domestic beneficiary Foreign beneficiary

For Paperwork Reduction Act Notice, see the Instructions for Form 1041. Cat. No. 11380D Schedule K-1 (Form 1041) 2008

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Schedule D Tax Worksheet Keep for Your Records

Complete this worksheet only if:

• On Schedule D, line 14b, column (2), or line 14c, column (2), is more than zero, or
• Both line 2b(1) of Form 1041 and line 4g of Form 4952 are more than zero.
Exception: Do not use this worksheet to figure the estate’s or trust’s tax if line 14a, column (2), or line 15, column (2), of Schedule D or Form
1041, line 22 is zero or less; instead, see the instructions for Schedule G, line 1a of Form 1041.
1. Enter the estate’s or trust’s taxable income from Form 1041, line 22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. 10,025
2. Enter qualified dividends, if any, from Form 1041, line 2b(2) . . . . . . . . . . . 2. 629
3. Enter the amount from Form 4952, line 4g . . . . . . . . . . . . 3.
4. Enter the amount from Form 4952, line 4e* . . . . . . . . . . . . 4.
5. Subtract line 4 from line 3. If zero or less, enter -0- . . . . . . . . . . . . . . . . . 5. -0-
6. Subtract line 5 from line 2. If zero or less, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. 629
7. Enter the smaller of line 14a, col. (2) or line 15, col. (2) from Sch. D . . . . . 7. 200
8. Enter the smaller of line 3 or line 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. -0-
9. Subtract line 8 from line 7. If zero or less, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9. 200
10. Add lines 6 and 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10. 829
11. Add lines 14b, column (2) and 14c, column (2) from Schedule D . . . . . . . . . . . . . . . . . . . . 11. 200
12. Enter the smaller of line 9 or line 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12. 200
13. Subtract line 12 from line 10. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13. 629
14. Subtract line 13 from line 1. If zero or less, enter -0-. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14. 9,396
15. Enter the smaller of line 1 or $2,200 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15. 2,200
16. Enter the smaller of line 14 or line 15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16. 2,200
17. Subtract line 10 from line 1. If zero or less, enter -0- . . . . . . . . . . . . . . . . 17. 9,196
18. Enter the larger of line 16 or line 17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  18. 9,196
If lines 15 and 16 are the same, skip line 19 and go to line 20. Otherwise,
go to line 19.
19. Subtract line 16 from line 15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  19.
If lines 1 and 15 are the same, skip lines 20 through 32 and go to line 33. Otherwise, go to line 20.
20. Enter the smaller of line 1 or line 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20. 629
21. Enter the amount from line 19 (if line 19 is blank, enter -0-) . . . . . . . . . . . . . . . . . . . . . . . 21. -0-
22. Subtract line 21 from line 20. If zero or less, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  22. 629
23. Multiply line 22 by 15% (.15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23. 94
If Schedule D, line 14b, column (2) is zero or blank, skip lines 24 through 29 and go to line 30. Otherwise, go to
line 24.
24. Enter the smaller of line 9 (above) or line 14b, col. (2) (from Schedule D) . . . . . . . . . . . . . 24.
25. Add lines 10 and 18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.
26. Enter the amount from line 1 above . . . . . . . . . . . . . . . . . . . . . . . . . . . 26.
27. Subtract line 26 from line 25. If zero or less, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . 27.
28. Subtract line 27 from line 24. If zero or less, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  28.
29. Multiply line 28 by 25% (.25) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29.
If Schedule D, line 14c, column (2) is zero or blank, skip lines 30 through 32 and go to line 33. Otherwise, go to
line 30.
30. Add lines 18, 19, 22, and 28 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30. 9,825
31. Subtract line 30 from line 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31. 200
32. Multiply line 31 by 28% (.28) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32. 56
33. Figure the tax on the amount on line 18. Use the 2008 Tax Rate Schedule in the Instructions for Form 1041 . . . . . . . . . . 33. 2,268
34. Add lines 23, 29, 32, and 33 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34. 2,418
35. Figure the tax on the amount on line 1. Use the 2008 Tax Rate Schedule in the Instructions for Form 1041 . . . . . . . . . . . 35. 2,541
36. Tax on all taxable income (including capital gains and qualified dividends). Enter the smaller of line 34 or line 35
here and on line 1a of Sch. G, Form 1041 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36. 2,418

*If applicable, enter instead the smaller amount entered on the dotted line next to line 4e of Form 4952.

Page 40 Publication 559 (2008)

1041_Prep_Book_10.indb 212 10/19/2009 10:15:30 AM

 P U B L I C AT I O N 5 5 9 213

Table A. Checklist of Forms and Due Dates For Executor, Administrator, or Personal Representative
Form No. Title Due Date**
As soon as possible. The identification number must
SS-4 Application for Employer Identification Number be included in returns, statements, and other
documents.
56 Notice Concerning Fiduciary Relationship As soon as all necessary information is available.*
United States Estate (and Generation-Skipping Transfer) Tax
706 9 months after date of decedent’s death.
Return
6 months after cessation or disposition of
706-A United States Additional Estate Tax Return
special-use valuation property.
706-GS(D) Generation-Skipping Transfer Tax Return for Distributions See form instructions.
706-GS(D-1) Notification of Distribution From a Generation-Skipping Trust See form instructions.
706-GS(T) Generation-Skipping Transfer Tax Return for Terminations See form instructions.
United States Estate (and Generation-Skipping Transfer) Tax
706-NA Return, Estate of nonresident not a citizen of the United 9 months after date of decedent’s death.
States
712 Life Insurance Statement Part I to be filed with estate tax return.
1040 U.S. Individual Income Tax Return Generally, April 15th of the year after death.**
1040NR U.S. Nonresident Alien Income Tax Return See form instructions.
15th day of 4th month after end of estate’s tax
1041 U.S. Income Tax Return for Estates and Trusts
year.**
1041-T Allocation of Estimated Tax Payments to Beneficiaries 65th day after end of estate’s tax year.
Generally, April 15, June 15, Sept. 15, and Jan. 15
1041-ES Estimated Income Tax for Estates and Trusts
for calendar-year filers.**
Annual Withholding Tax Return for U.S. Source Income of
1042 March 15th.**
Foreign Persons
1042-S Foreign Person’s U.S. Source Income Subject to Withholding March 15th.**
Application for Extension of Time To File a Return and/or Pay
4768 See form instructions.
U.S. Estate (and Generation-Skipping Transfer) Taxes
Request for Prompt Assessment Under Internal Revenue As soon as possible after filing Form 1040 or Form
4810
Code Section 6501(d) 1041.
Application for Automatic Extension of Time To File U.S.
4868 April 15th.**
Individual Income Tax Return
Request for Discharge From Personal Liability Under Internal
5495 See form instructions.
Revenue Code Section 2204 or 6905
Application for Automatic Extension of Time to File Certain 15th day of 4th month after end of estate’s tax
7004
Business Income Tax, Information, and Other Returns year.**
Report of Cash Payments Over $10,000 Received in a Trade
8300 15th day after the date of the transaction.
or Business
8822 Change of Address As soon as the address is changed.
* A personal representative must report the termination of the estate, in writing, to the Internal Revenue Service. Form 56 can be used for this purpose.
** If the due date falls on a Saturday, Sunday, or legal holiday, file on the next business day.

Publication 559 (2008) Page 41

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 214 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E

Table B. Worksheet To Reconcile Amounts Reported in Name of Decedent

on Information Returns (Forms W-2, 1099-INT, 1099-DIV, etc.) Keep for Your Records

Name of Decedent Date of Death Decedent’s Social Security Number

Name of Personal Representative, Executor, or Administrator Estate’s Employer Identification Number (If Any)

A B C D
Enter total amount Enter part of Amount Part of column C
shown on amount in reportable on that is income in
Source information return column A estate’s or respect of a
(list each payer) reportable on beneficiary’s decedent
decedent’s final income tax
return return (column A
minus column B)
1. Wages

2. Interest income

3. Dividends

4. State income tax refund

5. Capital gains
6. Pension income

7. Rents, royalties

8. Taxes withheld*

9. Other items, such as social security,

business and farm income or loss,
unemployment compensation, etc.

* List each withholding agent (employer, etc.)

Page 42 Publication 559 (2008)

1041_Prep_Book_10.indb 214 10/19/2009 10:15:34 AM


How To Get Tax Help
You can get help with unresolved tax issues,
order free publications and forms, ask tax ques-
tions, and get information from the IRS in sev-
eral ways. By selecting the method that is best
for you, you will have quick and easy access to
tax help.
Contacting your Taxpayer Advocate. The
Taxpayer Advocate Service (TAS) is an inde-
pendent organization within the IRS whose em-
ployees assist taxpayers who are experiencing
economic harm, who are seeking help in resolv-
ing tax problems that have not been resolved
through normal channels, or who believe that an
IRS system or procedure is not working as it
should.
You can contact the TAS by calling the TAS
toll-free case intake line at 1-877-777-4778 or
TTY/TDD 1-800-829-4059 to see if you are eligi-
ble for assistance. You can also call or write your
local taxpayer advocate, whose phone number
and address are listed in your local telephone
directory and in Publication 1546, Taxpayer Ad-
vocate Service — Your Voice at the IRS. You
can file Form 911, Request for Taxpayer Advo-
cate Service Assistance (And Application for
Taxpayer Assistance Order), or ask an IRS em-
ployee to complete it on your behalf. For more
information, go to www.irs.gov/advocate.
Low Income Taxpayer Clinics (LITCs).
LITCs are independent organizations that pro-
vide low income taxpayers with representation
in federal tax controversies with the IRS for free
or for a nominal charge. The clinics also provide
tax education and outreach for taxpayers with
limited English proficiency or who speak English
as a second language. Publication 4134, Low
Income Taxpayer Clinic List, provides informa-
tion on clinics in your area. It is available at www.
irs.gov or at your local IRS office.
Free tax services. To find out what services
are available, get Publication 910, IRS Guide to
Free Tax Services. It contains lists of free tax
information sources, including publications,
services, and free tax education and assistance
programs. It also has an index of over 100
TeleTax topics (recorded tax information) you
can listen to on your telephone.
Accessible versions of IRS published prod-
ucts are available on request in a variety of
alternative formats for people with disabilities.
Internet. You can access the IRS web-
site at www.irs.gov 24 hours a day, 7
days a week to:
• E-file your return. Find out about commer-
cial tax preparation and e-file services
available free to eligible taxpayers.
• Check the status of your 2008 refund. Go
to www.irs.gov and click on Where’s My
Refund. Wait at least 72 hours after the
IRS acknowledges receipt of your e-filed
return, or 3 to 4 weeks after mailing a
paper return. If you filed Form 8379 with
your return, wait 14 weeks (11 weeks if
you filed electronically). Have your 2008
tax return available so you can provide
your social security number, your filing
status, and the exact whole dollar amount
of your refund.
Publication 559 (2008)
1041_Prep_Book_10.indb 215
• Download forms, instructions, and publica-
tions.
• Order IRS products online.
• Research your tax questions online.
• Search publications online by topic or
keyword.
• View Internal Revenue Bulletins (IRBs)
published in the last few years.
• Figure your withholding allowances using
the withholding calculator online at
www.irs.gov/individuals.
• Determine if Form 6251 must be filed us-
ing our Alternative Minimum Tax (AMT)
Assistant.
• Sign up to receive local and national tax
news by email.
• Get information on starting and operating
a small business.
Phone. Many services are available by
phone.
• Ordering forms, instructions, and publica-
tions. Call 1-800-829-3676 to order cur-
rent-year forms, instructions, and
publications, and prior-year forms and in-
structions. You should receive your order
within 10 days.
• Asking tax questions. Call the IRS with
your tax questions at 1-800-829-1040.
• Solving problems. You can get
face-to-face help solving tax problems
every business day in IRS Taxpayer As-
sistance Centers. An employee can ex-
plain IRS letters, request adjustments to
your account, or help you set up a pay-
ment plan. Call your local Taxpayer Assis-
tance Center for an appointment. To find
the number, go to www.irs.gov/localcon-
tacts or look in the phone book under
United States Government, Internal Reve-
nue Service.
• TTY/TDD equipment. If you have access
to TTY/TDD equipment, call
1-800-829-4059 to ask tax questions or to
order forms and publications.
• TeleTax topics. Call 1-800-829-4477 to lis-
ten to pre-recorded messages covering
various tax topics.
• Refund information. To check the status of
your 2008 refund, call 1-800-829-1954
during business hours or 1-800-829-4477
(automated refund information 24 hours a
day, 7 days a week). Wait at least 72
hours after the IRS acknowledges receipt
of your e-filed return, or 3 to 4 weeks after
mailing a paper return. If you filed Form
8379 with your return, wait 14 weeks (11
weeks if you filed electronically). Have
your 2008 tax return available so you can
provide your social security number, your
filing status, and the exact whole dollar
amount of your refund. Refunds are sent
out weekly on Fridays. If you check the
status of your refund and are not given the
P U B L I C AT I O N 5 5 9 215
date it will be issued, please wait until the
next week before checking back.
• Other refund information. To check the
status of a prior year refund or amended
return refund, call 1-800-829-1954.
Evaluating the quality of our telephone
services. To ensure IRS representatives give
accurate, courteous, and professional answers,
we use several methods to evaluate the quality
of our telephone services. One method is for a
second IRS representative to listen in on or
record random telephone calls. Another is to ask
some callers to complete a short survey at the
end of the call.
Walk-in. Many products and services
are available on a walk-in basis.
• Products. You can walk in to many post
offices, libraries, and IRS offices to pick up
certain forms, instructions, and publica-
tions. Some IRS offices, libraries, grocery
stores, copy centers, city and county gov-
ernment offices, credit unions, and office
supply stores have a collection of products
available to print from a CD or photocopy
from reproducible proofs. Also, some IRS
offices and libraries have the Internal Rev-
enue Code, regulations, Internal Revenue
Bulletins, and Cumulative Bulletins avail-
able for research purposes.
• Services. You can walk in to your local
Taxpayer Assistance Center every busi-
ness day for personal, face-to-face tax
help. An employee can explain IRS letters,
request adjustments to your tax account,
or help you set up a payment plan. If you
need to resolve a tax problem, have ques-
tions about how the tax law applies to your
individual tax return, or you are more com-
fortable talking with someone in person,
visit your local Taxpayer Assistance
Center where you can spread out your
records and talk with an IRS representa-
tive face-to-face. No appointment is nec-
essary — just walk in. If you prefer, you
can call your local Center and leave a
message requesting an appointment to re-
solve a tax account issue. A representa-
tive will call you back within 2 business
days to schedule an in-person appoint-
ment at your convenience. If you have an
ongoing, complex tax account problem or
a special need, such as a disability, an
appointment can be requested. All other
issues will be handled without an appoint-
ment. To find the number of your local
office, go to www.irs.gov/localcontacts or
look in the phone book under United
States Government, Internal Revenue
Service.
Mail. You can send your order for
forms, instructions, and publications to
the address below. You should receive
a response within 10 days after your request is
received.
Internal Revenue Service
1201 N. Mitsubishi Motorway
Bloomington, IL 61705-6613
Page 43
10/19/2009 10:15:35 AM
 216 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E
DVD for tax products. You can order
Publication 1796, IRS Tax Products
DVD, and obtain:
• Current-year forms, instructions, and pub-
lications.
• Prior-year forms, instructions, and publica-
tions.
• Tax Map: an electronic research tool and
finding aid.
• Tax law frequently asked questions.
• Tax Topics from the IRS telephone re-
sponse system.
• Internal Revenue Code — Title 26 of the
U.S. Code.
• Fill-in, print, and save features for most tax
forms.
• Internal Revenue Bulletins.
• Toll-free and email technical support.
• Two releases during the year.
– The first release will ship the beginning
Page 44
1041_Prep_Book_10.indb 216
of January 2009.
– The final release will ship the beginning
of March 2009.
Purchase the DVD from National Technical
Information Service (NTIS) at www.irs.gov/
cdorders for $30 (no handling fee) or call
1-877-233-6767 toll free to purchase the DVD
for $30 (plus a $6 handling fee).
Small Business Resource Guide
2009. This online guide is a must for
every small business owner or any tax-
payer about to start a business. This year’s
guide includes:
• Helpful information, such as how to pre-
pare a business plan, find financing for
your business, and much more.
• All the business tax forms, instructions,
and publications needed to successfully
manage a business.
• Tax law changes for 2009.
• Tax Map: an electronic research tool and
finding aid.
• Web links to various government agen-
cies, business associations, and IRS orga-
nizations.
• “Rate the Product” survey — your opportu-
nity to suggest changes for future editions.
• A site map of the guide to help you navi-
gate the pages with ease.
• An interactive “Teens in Biz” module that
gives practical tips for teens about starting
their own business, creating a business
plan, and filing taxes.
The information is updated during the year.
Visit www.irs.gov and enter keyword “SBRG” in
the upper right-hand corner for more informa-
tion.
Publication 559 (2008)
10/19/2009 10:15:37 AM
 225

1041 PREPARATION AND PLANNING GUIDE

CPE Quizzer Instructions

The CPE Quizzer is divided into three Modules. There is a processing fee for each Quizzer
Module submitted for grading. Successful completion of Module 1 is recommended for 7
CPE Credits.* Successful completion of Module 2 is recommended for 7 CPE Credits.*
Successful completion of Module 3 is recommended for 2 CPE Credits.* You can complete
and submit one Module at a time or all Modules at once for a total of 16 CPE Credits.*
To obtain CPE credit, return your completed Answer Sheet for each Quizzer Module to CCH
Continuing Education Department, 4025 W. Peterson Ave., Chicago, IL 60646, or fax
it to (773) 866-3084. Each Quizzer Answer Sheet will be graded and a CPE Certificate of
Completion awarded for achieving a grade of 70 percent or greater. A Quizzer Answer Sheet
for each Module is located after the Quizzer questions for this Course.
Express Grading: Processing time for your Answer Sheet is generally 8-12 business days.
If you are trying to meet a reporting deadline, our Express Grading Service is available for
an additional $19 per Module. To use this service, please check the “Express Grading”
box on your Answer Sheet and provide your CCH account or credit card number and
your fax number. CCH will fax your results and a Certificate of Completion (upon
achieving a passing grade) to you by 5:00 p.m. the business day following our receipt
of your Answer Sheet. If you mail your Answer Sheet for Express Grading, please
write “ATTN: CPE OVERNIGHT” on the envelope. NOTE: CCH will not Federal
Express Quizzer results under any circumstances.

NEW ONLINE GRADING gives you immediate 24/7 grading with instant results and no
Express Grading Fee.
The CCH Testing Center website gives you and others in your firm easy, free access
to CCH print Courses and allows you to complete your CPE Quizzers online for im-
mediate results. Plus, the My Courses feature provides convenient storage for your
CPE Course Certificates and completed Quizzers.
Go to www.cchtestingcenter.com to complete your Quizzer online.

Accreditation: All CCH Continuing Education programs are prepared in accordance

with the AICPA’s Statement on Standards for Formal Group and Self-Study Programs,
as well as with the guidelines of various state boards of accountancy. In addition, CCH
is registered as a sponsor of Continuing Professional Education with the National As-
sociation of State Boards of Accountancy (NASBA). State boards, however, have final
authority over the approval of individual Courses.

* Recommended CPE credit is based on a 50-minute hour. Participants earning

credits for states that require self-study to be based on a 100-minute hour will
receive ½ the CPE credits for successful completion of this Course. Because CPE
requirements vary from state to state and among different licensing agencies,
please contact your CPE governing body for information on your CPE requirements
and the applicability of a particular Course for your requirements.

1041_Prep_Book_10.indb 225 10/19/2009 10:15:43 AM

 226 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E

Date of Completion: The date of completion on your Certificate will be the date that
you put on your Answer Sheet. However, you must submit your Answer Sheet to CCH
for grading within two weeks of completing it.
Expiration Date: February 28, 2010
Evaluation: To help us provide you with the best possible products, please take a mo-
ment to fill out the Course Evaluation located at the back of this Course and return it
with your Quizzer Answer Sheets.

CCH is registered with the National Association of State Boards of Accountancy (NASBA) as a
sponsor of continuing professional education on the National Registry of CPE Sponsors. State
boards of accountancy have final authority on the acceptance of individual courses for CPE
credit. Complaints regarding registered sponsors may be addressed to the National Registry of
CPE Sponsors, 150 Fourth Avenue North, Suite 700, Nashville, TN 37219-2417. Web site: www.
nasba.org.

CCH is registered with the National Association of State Boards of Accountancy (NASBA) as a
Quality Assurance Service (QAS) sponsor of continuing professional education. State boards of
accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints
regarding registered sponsors may be addressed to NASBA, 150 Fourth Avenue North, Suite 700,
Nashville, TN 37219-2417. Web site: www.nasba.org.

CCH has been approved by the California Tax Education Council to offer courses that provide
federal and state credit towards the annual “continuing education” requirement imposed by the
State of California. A listing of additional requirements to register as a tax preparer may be obtained
by contacting CTEC at P.O. Box 2890, Sacramento, CA, 95812-2890, toll-free by phone at (877)
850-2832, or on the Internet at www.ctec.org.

Prerequisite: None Recommended CPE: Processing Fee:

Course Level: Basic 7 hours for Module 1 $60.00 for Module 1
Field of Study: Taxes 7 hours for Module 2 $60.00 for Module 2
2 hours for Module 3 $20.00 for Module 3
16 hours for all Modules $140.00 for all Modules
CTEC Course Number: CTEC Federal Hours: CTEC California Hours:
1075-CE-7993 for Module 1 3 hours for Module 1 N/A for Module 1
1075-CE-7983 for Module 2 3 hours for Module 2 N/A for Module 2
1075-CE-7973 for Module 3 1 hours for Module 3 N/A for Module 3
7 hours for all Modules N/A for all Modules

1041_Prep_Book_10.indb 226 10/19/2009 10:15:43 AM

 1041 PREPARATION AND PLANNING GUIDE

Quizzer Questions: Module 1

1. Which of the following statements is not correct? 6. Which of the following is not an item of income
in respect of a decedent (IRD)?
a. The taxation of trusts and estates is governed by
Subchapter J of the Internal Revenue Code. a. Capital gains on common stock sold by the
b. Form 1041 is an income tax return for most fiduciary after the decedent’s death but owned
types of trusts and decedent’s estates. by the decedent at the time of death.
c. Form 1041 supports the entity theory since all b. Salary earned by the decedent at the time of
income received by a trust or estate is taxed to his or her death but payable to the estate after
the entity. death.
c. The proceeds from the completed sale of
2. Which of the following entities does not use farm produce that were not paid before the
Form 1041? decedent’s death.
d. Accrued interest on Series EE bonds not report-
a. Family limited liability company ed on the decedent’s final income tax return.
b. Decedent’s estate
c. Complex trust
7. A simple or complex trust must file a return if:
3. Which of the following schedules has a special ver- a. It had gross income of $600 or more
sion that is unique to Form 1041? b. It had any taxable income
c. It had a nonresident alien beneficiary
a. Schedule C d. All of the above
b. Schedule D
c. Schedule E
8. Which type of entity has an $9,350 gross income
d. Schedule F
filing threshold for 2009?
4. Which one of the following is not a benefi- a. Bankruptcy estate
ciary? b. Decedent’s estate
c. Grantor trust that is not a revocable grantor trust
a. An heir
b. A fiduciary
9. Even though the executor and trustee elect to treat
c. A legatee
a qualified revocable trust (QRT) as part of the
d. A devisee
estate for income tax purposes both the estate and
trust must file Form 1041. True or False?
5. Which term is not used to describe the property
held in trust?
10. The benefits to making a Section 645 election
a. Principal include each of the following except:
b. Corpus
a. The income from the revocable trust becomes
c. Income
tax free.
d. Res
b. The trust can elect a fiscal year for tax reporting
purposes.
c. For the first two years after the decedent’s
death, the trust does not have to make esti-
mated tax payments.

1041_Prep_Book_10.indb 227 10/19/2009 10:15:45 AM

 228 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E

11. A decedent’s estate has a fiscal year ending August 17. Which statement concerning a qualified disability
31. The due date for the estate’s income tax return trust is not correct?
for 2009 is:
a. The trust can be established for a beneficiary only
a. October 15, 2009 up to the age of 65.
b. December 15, 2009 b. The trust can be set up by the disabled per-
c. April 15, 2010 son.
c. The trust must be set up by a parent, grandpar-
12. A trust wants an automatic extension of time to ent, legal guardian or court, for the benefit of a
file Form 1041. To obtain this extension, it must disabled person.
timely file which of the following forms? d. The trust is not disqualified merely because
corpus may revert to a person who is not
a. Form 2758 disabled after the trust ceases to have any
b. Form 4868 disabled beneficiaries.
c. Form 7004
18. Which statement about a charitable remainder trust
13. With respect to a filing extension for the income tax is correct?
return of a decedent’s estate, which of the following
statements is correct? a. It can be set up during a person’s lifetime or by
will.
a. An estate can never obtain a filing extension. b. It can have a noncharitable remainderman.
b. An estate can obtain an automatic filing c. Income beneficiaries are exempt from taxation.
extension.
c. An estate can request and receive a filing exten-
19. Which of the following statements about the por-
sion if there is reasonable cause.
tion of an electing small business trust (ESBT)
holding stock in an S corporation is not correct?
14. All of the following statements about where to file
the fiduciary return are correct except: a. It is a separate trust.
b. It cannot claim an exemption amount.
a. The filing address depends on whether or not a c. The tax on income of the portion of the trust
payment is enclosed with the return. owning S corporation stock is figured at the high-
b. The filing location generally is based on the
est marginal rate imposed on trusts and estates.
location of the beneficiaries. d. Items of income, deduction, credit, etc. of the
c. The filing location generally is based on the
portion of the trust owning S corporation stock
location of the fiduciary. are allocated to the beneficiary.
15. A simple trust (assuming no distributions of prin- 20. Which feature makes an Alaska Native settlement
cipal) is: trust unique?
a. Qualified Subchapter S trust a. The trust can elect to be taxed on its income at
b. Qualified terminable interest property trust the lowest federal rates for unmarried individual
c. Both of the above taxpayers.
d. None of the above b. Income earned by the trust is tax free.
c. The trust can accumulate income for the health,
16. A complex trust is: education and welfare of its beneficiaries.
a. A charitable remainder trust
b. A discretionary trust
c. All of the above
d. None of the above

1041_Prep_Book_10.indb 228 10/19/2009 10:15:45 AM


21. Which of the following statements about abusive
trusts is not correct?
a. Deductions claimed by a trust formed to pay
the personal expenses of the grantor on a tax-
deductible basis will be disallowed and the
grantor may be subject to penalties.
b. Charitable lead and remainder trusts can never
be considered abusive trusts.
c. The IRS has included abusive trusts in its list of
the “Dirty Dozen” tax scams.
22. A decedent’s estate filing Form 1041 need not attach
a copy of the will to the return. True or False?
23. Which of the following information is not required
to be included on page 1 of Form 1041?
a. The name and address of the fiduciary
b. The name and address of the beneficiary
c. The date the entity was created
d. The number of Schedule K-1s attached
24. Which statement is correct regarding the income
tax return for a decedent’s estate?
a. It must show the estate’s employer identification
number (EIN).
b. It must show the decedent’s Social Security
number (SSN).
c. The fiduciary can file the return under either
the estate’s EIN or the decedent’s SSN.
25. Which of the following statements is not correct?
a. A trust (other than qualified revocable trusts
that elect to be treated and taxed as part of the
estate) must use a calendar year
b. An estate must use a calendar year
c. An estate may use a calendar year
26. Which of the following statements about Form
1041 is correct?
a. The amount of tax-exempt income must be
reported in the Income section on page 1 of
Form 1041.
b. The amount of tax-exempt income must be
reported in the Other Information section on
page 2 of Form 1041.
c. Tax-exempt income is not reported on Form
1041.
1041_Prep_Book_10.indb 229
QUIZZER QUESTIONS — MODULE 1 229
27. On the Form 1041 for a decedent’s estate, the
fiduciary must indicate if the estate has been open
for more than _____ years.
a. One
b. Two
c. Three
28. For fiduciary accounting purposes, the allocation
of receipts between income and principal is based
primarily on the local law and secondarily on the
governing instrument. True or False?
29. Which statement concerning the Uniform Principal
and Income Act (UPAIA) is not correct?
a. Not all states have enacted the most recent ver-
sion of the act.
b. The act authorizes the trustee to make alloca-
tions of some principal to income (and some
income to principal) in order to distribute a fair
share to the income beneficiary.
c. The UPAIA overrides a grantor’s/decedent’s
wishes.
30. Some states give the trustee discretion to convert a
trust to a noncharitable unitrust if the beneficiaries
have no objections. True or False?
31. Which of the following statements is not correct?
a. Depreciation is allocated to the entity only to the
extent it is not allocated to the beneficiary.
b. For property held by a trust, if the governing
instrument requires or permits the trustee to
maintain a depreciation reserve, depreciation
is first allocated to the trust up to the amount
of the reserve, with any excess allocated to the
beneficiary according to the accounting rules.
c. The Code Sec. 179 first-year expense deduction
is allocated between the fiduciary and benefi-
ciary on the basis of income allocable to each.
32. Which of the following statements is not correct?
a. State income taxes allocable to tax-exempt in-
come can be deducted.
b. Business expenses allocable to tax-exempt in-
come can be deducted.
c. Expenses directly related to tax-exempt income
must be allocated only to that income.
d. No expenses allocable to tax-exempt income can
be deducted.
10/19/2009 10:15:45 AM
 230 1 0 4 1 P R E PA R AT I O N A N D P L A N N I N G G U I D E

33. A trust receives $2,000 of tax-exempt interest, 35. Assuming the same facts as in questions 33 and 34,
$8,000 of taxable dividends, and no other income. what portion of the fees is deductible?
The percentage of tax-exempt income to gross
a. $500
income is:
b. $400
a. 0 percent c. $0
b. 20 percent
c. 100 percent

34. Assuming the same facts as question 33 and as-

suming further that the trustee had accounting fees
of $500, what portion of these fees is not deduct-
ible?
a. $0
b. $100
c. $500

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 237

1041 PREPARATION AND PLANNING GUIDE (0799-3)

Module 1: Answer Sheet

NAME ________________________________________________________________________________

COMPANY NAME ______________________________________________________________________

STREET _______________________________________________________________________________

CITY, STATE, & ZIP CODE _______________________________________________________________

BUSINESS PHONE NUMBER ____________________________________________________________

E-MAIL ADDRESS ______________________________________________________________________

DATE OF COMPLETION ________________________________________________________________

CFP REGISTRANT ID (for Certified Financial Planners) _________________________________________

CRTP ID (for CTEC Credit only) ________________________________ (CTEC Course # 1075-CE-7993)

On the next page, please answer the Multiple Choice questions by indicating the appropriate letter next
to the corresponding number. Please answer the True/False questions by marking “T” or “F” next to the
corresponding number.
A $60.00 processing fee will be charged for each user submitting Module 1 for grading.
Please remove both pages of the Answer Sheet from this book and return them with your com-
pleted Evaluation Form to CCH at the address below. You may also fax your Answer Sheet to
CCH at 773-866-3084.

You may also go to www.cchtestingcenter.com to complete your Quizzer online.

METHOD OF PAYMENT:

Check Enclosed Visa Master Card AmEx

Discover CCH Account* _____________________________________

Card No. ______________________________________ Exp. Date ___________________

Signature _____________________________________

* Must provide CCH account number for this payment option

EXPRESS GRADING: Please fax my Course results to me by 5:00 p.m. the business day
following your receipt of this Answer Sheet. By checking this box I authorize CCH to charge
$19.00 for this service.

Express Grading $19.00 Fax No. _________________________________

Mail or fax to:

CCH Continuing Education Department

4025 W. Peterson Ave.
Chicago, IL 60646-6085
1-800-248-3248
Fax: 773-866-3084 PAGE 1 OF 2

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 239

1041 PREPARATION AND PLANNING GUIDE (0799-3)

Module 1: Answer Sheet

Please answer the Multiple Choice questions by indicating the appropriate letter next
to the corresponding number. Please answer the True/False questions by marking “T”
or “F” next to the corresponding number.

1. 10. 19. 28.

2. 11. 20. 29.

3. 12. 21. 30.

4. 13. 22. 31.

5. 14. 23. 32.

6. 15. 24. 33.

7. 16. 25. 34.

8. 17. 26. 35.

9. 18. 27.

Please complete the Evaluation Form (located after the Module 3 Answer Sheet) and
return it with this Quizzer Answer Sheet to CCH at the address on the previous page.
Thank you.

PAGE 2 OF 2

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1041_Prep_Book_10.indb 240 10/19/2009 10:15:47 AM
 249

1041 PREPARATION AND PLANNING GUIDE (4773-4)

Evaluation Form
Please take a few moments to fill out and mail or fax this evaluation to CCH so that we can better
provide you with the type of self-study programs you want and need. Thank you.

About This Program

1. Please circle the number that best reflects the extent of your agreement with the following
statements:
Strongly Strongly
Agree Disagree

a. The Course objectives were met. 5 4 3 2 1

b. This Course was comprehensive and organized. 5 4 3 2 1
c. The content was current and technically accurate. 5 4 3 2 1
d. This Course was timely and relevant. 5 4 3 2 1
e. The prerequisite requirements were appropriate. 5 4 3 2 1
f. This Course was a valuable learning experience. 5 4 3 2 1
g. The Course completion time was appropriate. 5 4 3 2 1

2. This Course was most valuable to me because of:

Continuing Education credit Convenience of format

Relevance to my practice/ Timeliness of subject matter
employment Reputation of author
Price
Other (please specify) _________________________________________________

3. How long did it take to complete this Course? (Please include the total time spent reading
or studying reference materials and completing CPE Quizzer).
Module 1 Module 2 Module 3
4. What do you consider to be the strong points of this Course?

5. What improvements can we make to this Course?

PAGE 1 OF 2

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1041 PREPARATION AND PLANNING GUIDE (4773-4)

Evaluation Form cont’d

General Interests

1. Preferred method of self-study instruction:

Text Audio Computer-based/Multimedia Video

2. What specific topics would you like CCH to develop as self-study programs?

_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________

3. Please list other topics of interest to you ________________________________________________

_______________________________________________________________________________
_______________________________________________________________________________

About You

1. Your profession:
CPA Enrolled Agent
Attorney Tax Preparer
Financial Planner Other (please specify) _________________________

2. Your employment:
Self-Employed Public Accounting Firm
Service Industry Non-Service Industry
Banking/Finance Government
Education Other ____________________________________

3. Size of firm/corporation:
1 2-5 6-10 11-20 21-50 51+

4. Your Name _______________________________________________________

Firm/Company Name __________________________________________________________
Address _______________________________________________________________________
City, State, Zip Code ________________________________________________________________
E-mail Address ________________________________________________________________

THANK YOU FOR TAKING THE TIME TO COMPLETE THIS SURVEY!

PAGE 2 OF 2

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