Instructions For Form 1120-Sf - U.s. Income Tax Return For Settlement Funds

Accounting Method

establish, or grants its initial or preliminary

Classification of fund prior to meeting

approval of, the fund, even if that order or

all three requirements. If a fund meets

A designated or qualified settlement fund

approval may be subject to review or

the resolve or satisfy requirement, the

must use the accrual method of

revision. Generally, a governmental

assets of the fund are treated as owned by

accounting.

authority's order or approval has no

the transferor of those assets until the fund

retroactive effect and does not permit a

Rounding Off to Whole

also meets the governmental order and

fund to be a qualified settlement fund prior

the segregation requirements. On the day

Dollars

to the date the order is issued or the

the fund meets all three requirements, the

approval is granted. However, see

The fund may round off cents to whole

transferor is treated as transferring the

Relation-back rule below.

dollars on its return and schedules. If the

assets to a qualified settlement fund.

fund does round to whole dollars, it must

Arbitration panels. An arbitration award

Relation-back rule. If a fund meets the

round all amounts. To round, drop

that orders the establishment of, or

resolve or satisfy requirement and the

amounts under 50 cents and increase

approves, a fund is an order or approval of

segregation requirement before it meets

amounts from 50 cents to 99 cents to the

a governmental authority if:

the governmental order or approval

next dollar. For example, $1.39 becomes

The arbitration award is judicially

requirement, the transferor and the

$1 and $2.50 becomes $3.

enforceable;

administrator (defined below) may jointly

The arbitration award is issued

If two or more amounts must be added

elect the relation-back election (defined

following a bona fide arbitration

below) to treat the fund as coming into

to figure the amount to enter on a line,

proceeding in accordance with rules

existence as a qualified settlement fund on

include cents when adding the amounts

approved by a governmental authority

the later of (a) the date the fund meets the

and round off only the total.

(such as self-regulatory

resolve or satisfy requirement and the

Recordkeeping

organization-administered arbitration

segregation requirement or (b) January 1

proceedings in the securities industry);

of the calendar year in which all three

Keep the fund's records for as long as

and

requirements are satisfied.

they may be needed for the administration

The fund is subject to the continuing

If a relation-back election is made, the

of any provision of the Internal Revenue

jurisdiction of the arbitration panel, the

assets held by the fund on the date the

Code. Usually, records that support an

court of law that has jurisdiction to enforce

qualified settlement fund is treated as

item of income, deduction, or credit on the

the arbitration award, or the governmental

coming into existence are treated as

return must be kept for 3 years from the

authority that approved the rules of the

transferred to the qualified settlement fund

date the return is due or filed, whichever is

arbitration proceedings.

on that date.

later. Keep records that verify the fund's

Resolve or satisfy requirement. To

basis in property for as long as they are

Relation-back election. Make the

meet this requirement, a fund must be

needed to figure the basis of the original or

relation-back election by attaching a copy

established to resolve or satisfy one or

replacement property.

of the election statement to Form 1120-SF

more contested or uncontested claims

for the tax year in which the qualified

The fund should keep copies of all filed

that have resulted, or may result, from an

settlement fund is treated as coming into

returns. They help in preparing future and

event (or a series of related events) that

existence. The statement must be signed

amended returns.

has occurred and that has given rise to at

by each transferor and the administrator.

least one claim asserting liability:

Additional Information

File Form 1120-SF and the election

Under the Comprehensive

statement by the due date of Form

Environmental Response, Compensation

See the Instructions for Form 1120 and

1120-SF, including extensions. The

and Liability Act of 1980 (CERCLA), as

Pub. 542, Corporations, for more

election statement must contain the

amended for settlement funds created

information about corporations, including

following:

before May 18, 2006;

additional forms the fund may need to file

The words “Regulations section

Arising out of a tort, breach of contract,

and how to get forms and publications.

1.468B-1 Relation-Back Election” at the

or violation of law; or

top of the first page.

Definitions

Designated by the IRS in a revenue

The name, address, and identifying

ruling or revenue procedure.

number of each transferor.

Qualified Settlement Fund

Generally, a fund does not meet the

The name, address, and EIN of the

resolve or satisfy requirement if it is

A fund, account, or trust (“a fund”) is a

qualified settlement fund.

established to resolve or satisfy a liability

qualified settlement fund if it meets the

The date on which the qualified

to provide property or services unless the

following requirements:

settlement fund is treated as coming into

Governmental order or approval

transferor's obligation to provide property

existence.

requirement,

or services is extinguished by a transfer or

A schedule describing each asset

transfers to the fund.

Resolve or satisfy requirement, and

treated as transferred to the fund on the

Segregation requirement.

date the fund is treated as coming into

Note. Settlement funds created after May

existence. The schedule of assets does

Governmental order or approval re-

17, 2006, for the purpose of resolving or

not have to identify the amount of cash or

quirement. To meet this requirement, the

satisfying liabilities under the CERCLA are

the property transferred by a particular

fund must be ordered by, or approved by,

exempt from tax. See section 468B(g)(2)

transferor.

the United States, any state (including the

for more information.

District of Columbia), territory, possession,

Qualified settlement fund treated as a

Segregation requirement. To meet this

or political subdivision thereof, or any

corporation. Except as otherwise

requirement, the fund must (a) be a trust

agency or instrumentality (including a

provided in Regulations section

under applicable state law or (b) keep its

court of law) of any of the foregoing, and it

1.468B-5(b), for purposes of subtitle F of

assets segregated from other assets of

must be subject to the continuing

the Internal Revenue Code, a qualified

the transferor (and related persons). For

jurisdiction of that governmental authority.

settlement fund is treated as a corporation

example, cash held by a transferor in a

and any tax imposed under Regulations

A fund is ordered by or approved by a

separate bank account satisfies the

section 1.468B-2(a) is treated as a tax

governmental authority when the authority

segregation requirement.

issues its initial or preliminary order to

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Instructions For Form 1120-Sf - U.s. Income Tax Return For Settlement Funds - 2016 Page 3

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