1999 Department of the TreasuryInternal Revenue Service

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

Paperwork Reduction Act Notice. We ask for the information on this form to carryout the Internal Revenue laws of the United States. You are required to give us theinformation. We need it to ensure that you are complying with these laws and to allowus to figure and collect the right amount of tax.

You are not required to provide the information requested on a form that is subjectto the Paperwork Reduction Act unless the form displays a valid OMB control number.Books or records relating to a form or its instructions must be retained as long as theircontents may become material in the administration of any Internal Revenue law.Generally, tax returns and return information are confidential, as required by Codesection 6103.

The time needed to complete and file this form and related schedules will varydepending on individual circumstances. The estimated average times are:

If you have comments concerning the accuracy of these time estimates orsuggestions for making this form and related schedules simpler, we would be happyto hear from you. You can write to the Tax Forms Committee, Western Area DistributionCenter, Rancho Cordova, CA 95743-0001. DO NOT send the tax form to this address.Instead, see Where To File on page 4.

Pending LegislationAt the time of printing, Congress wasconsidering legislation affecting theseinstructions. Included in the pendinglegislation are provisions that wouldchange the definition of a capital asset,modify the treatment of gains fromconstructive ownership transactions,repeal the use of installment method forcertain taxpayers, and limit the use of thenonaccrual experience method ofaccounting. See Pub. 553, Highlights of1999 Tax Changes, to find out if thislegislation was enacted, and details onthe changes.

A Change To NoteFor tax years beginning in 1999, therequirement to file a return for abankruptcy estate applies only if grossincome is at least $6,350.

Photographs of MissingChildrenThe Internal Revenue Service is a proudpartner with the National Center forMissing and Exploited Children.Photographs of missing children selectedby the Center may appear in instructionson pages that would otherwise be blank.You can help bring these children homeby looking at the photographs and calling1-800-THE-LOST (1-800-843-5678) if yourecognize a child.

Unresolved Tax ProblemsMost problems can be resolved with onecontact by calling, writing, or visiting anIRS office. But if the estate or trust hastried unsuccessfully to resolve a problemwith the IRS, it should contact theTaxpayer Advocate's office. The estateor trust will be assigned a personal

Contents PageSchedule D (Form 1041)—Capital

Gains and Losses . . . . . . . . . 24Schedule J (Form 1041)—

Accumulation Distribution forCertain Complex Trusts . . . . . . 29

Schedule K-1 (Form 1041)—Beneficiary's Share of Income,Deductions, Credits, etc. . . . . . 30

Form 1041 Schedule D Schedule J Schedule K-1

Recordkeeping 46 hr., 38 min. 27 hr., 59 min. 39 hr., 28 min. 8 hr., 51 min.Learning about the law or the form 18 hr., 25 min. 2 hr., 11 min. 1 hr., 17 min. 1 hr., 17 min.Preparing the form 34 hr., 53 min. 2 hr., 44 min. 1 hr., 59 min. 1 hr., 29 min.Copying, assembling, and sendingthe form to the IRS 4 hr., 17 min.

Contents PageContents PageOf Special Interest to Bankruptcy

Trustees and Debtors-in-Possession . . . . . . . . . . . 7

A Change To Note . . . . . . . . . 1Photographs of Missing Children . . 1Unresolved Tax Problems . . . . . 1 Specific Instructions . . . . . . . 8How To Get Forms and Publications 2 Name of Estate or Trust . . . . . . 8General Instructions . . . . . . . . 2 Address . . . . . . . . . . . . . . 8Purpose of Form . . . . . . . . . . 2 Type of Entity . . . . . . . . . . . 8Income Taxation of Trusts and

Decedents' Estates . . . . . . . . 2 Number of Schedules K-1 Attached 10Employer Identification Number . . . 10Abusive Trust Arrangements . . . . 2Date Entity Created . . . . . . . . . 10Definitions . . . . . . . . . . . . . . 3Nonexempt Charitable and

Split-Interest Trusts . . . . . . . . 10Who Must File . . . . . . . . . . . 3Electronic and Magnetic Media Filing 4 Initial Return, Amended Return, Final

Return; or Change in Fiduciary'sName or Address . . . . . . . . . 10

When To File . . . . . . . . . . . . 4Period Covered . . . . . . . . . . . 4

Pooled Mortgage Account . . . . . 10Where To File . . . . . . . . . . . . 4Income . . . . . . . . . . . . . . . 10Who Must Sign . . . . . . . . . . . 5Deductions . . . . . . . . . . . . . 11Accounting Methods . . . . . . . . 5Tax and Payments . . . . . . . . . 14Accounting Periods . . . . . . . . . 5Schedule A—Charitable Deduction . 15Rounding Off to Whole Dollars . . . 5Schedule B—Income Distribution

Deduction . . . . . . . . . . . . . 16Estimated Tax . . . . . . . . . . . 5Interest and Penalties . . . . . . . . 5

Schedule G—Tax Computation . . . 17Other Forms That May Be Required 6Other Information . . . . . . . . . . 18Assembly and Attachments . . . . . 7Schedule I—Alternative Minimum Tax 19Additional Information . . . . . . . . 7

Cat. No. 11372D

advocate who is in the best position to tryto resolve the problem.

Contact the Taxpayer Advocate if theestate or trust:● Is suffering or about to suffer asignificant hardship.● Is facing an immediate threat ofadverse action.● Will incur significant costs if relief is notgranted (including fees for professionalrepresentation).● Will suffer irreparable injury orlong-term adverse impact if relief is notgranted.● Has experienced a delay of more than30 calendar days to resolve a tax problemor inquiry.● Has not received a response orresolution to the problem by the datepromised.

The estate or trust may contact aTaxpayer Advocate by calling a toll-freeassistance number, 1-877-777-4778.Persons who have access to TTY/TDDequipment may call 1-800-829-4059 andask for the Taxpayer Advocate. If theestate or trust prefers, it may write to theTaxpayer Advocate at the IRS office thatlast contacted the estate or trust.

While Taxpayer Advocates cannotchange the tax law or make a technicaltax decision, they can clear up problemsthat resulted from previous contacts andensure that the estate's or trust's case isgiven a complete and impartial review.For more information about the TaxpayerAdvocate, see Pub. 1546, The TaxpayerAdvocate Service of the IRS.

How To Get Forms andPublications

Personal ComputerYou can access the IRS's Internet website 24 hours a day, 7 days a week atwww.irs.gov to:● Download forms, instructions, andpublications.● See answers to frequently asked taxquestions.● Search publications on-line by topic orkeyword.● Send us comments or request help viae-mail.● Sign up to receive local and national taxnews by e-mail.

You can also reach us using filetransfer protocol at ftp.irs.ustreas.gov.

CD-ROMOrder Pub. 1796, Federal Tax Productson CD-ROM, and get:● Current year forms, instructions, andpublications.● Prior year forms, instructions, andpublications.● Popular tax forms that may be filled inelectronically, printed out for submission,and saved for recordkeeping.● The Internal Revenue Bulletin.

Buy the CD-ROM on the Internet atwww.irs.gov/cdorders from the NationalTechnical Information Service (NTIS) for

$16 (plus a $5 handling fee) and save30%, or call 1-877-CDFORMS(1-877-233-6767) toll free to buy theCD-ROM for $23 (plus a $5 handling fee).

By Phone and in PersonYou can order forms and publications 24hours a day, 7 days a week, by calling1-800-TAX-FORM (1-800-829-3676). Youcan also get most forms and publicationsat your local IRS office.

General Instructions

Purpose of FormThe fiduciary of a domestic decedent'sestate, trust, or bankruptcy estate usesForm 1041 to report:● The income, deductions, gains, losses,etc. of the estate or trust;● The income that is either accumulatedor held for future distribution or distributedcurrently to the beneficiaries;● Any income tax liability of the estate ortrust; and● Employment taxes on wages paid tohousehold employees.

Income Taxation of Trustsand Decedents' EstatesA trust (except a grantor type trust) or adecedent's estate is a separate legalentity for Federal tax purposes. Adecedent's estate comes into existenceat the time of death of an individual. Atrust may be created during an individual'slife (inter vivos) or at the time of his or herdeath under a will (testamentary). If thetrust instrument contains certainprovisions, then the person creating thetrust (the grantor) is treated as the ownerof the trust's assets. Such a trust is agrantor type trust.

A trust or decedent's estate figures itsgross income in much the same manneras an individual. Most deductions andcredits allowed to individuals are alsoallowed to estates and trusts. However,there is one major distinction. A trust ordecedent's estate is allowed an incomedistribution deduction for distributions tobeneficiaries. To figure this deduction, thefiduciary must complete Schedule B. Theincome distribution deduction determinesthe amount of any distributions taxed tothe beneficiaries.

For this reason, a trust or decedent'sestate 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 distributiveshare of income. Schedule K-1 (Form1041) is used to notify the beneficiariesof the amounts to be included on theirincome tax returns.

Before preparing Form 1041, thefiduciary must figure the accountingincome of the estate or trust under thewill or trust instrument and applicablelocal law to determine the amount, if any,of income that is required to bedistributed, because the income

distribution deduction is based, in part, onthat amount.

Abusive Trust ArrangementsCertain trust arrangements purport toreduce or eliminate Federal taxes in waysthat are not permitted under the law.Abusive trust arrangements typically arepromoted by the promise of tax benefitswith no meaningful change in thetaxpayer's control over or benefit from thetaxpayer's income or assets. Thepromised benefits may include reductionor elimination of income subject to tax;deductions for personal expenses paid bythe trust; depreciation deductions of anowner's personal residence andfurnishings; a stepped-up basis forproperty transferred to the trust; thereduction or elimination ofself-employment taxes; and the reductionor elimination of gift and estate taxes.These promised benefits are inconsistentwith the tax rules applicable to abusivetrust arrangements.

Abusive trust arrangements often usetrusts to hide the true ownership of assetsand income or to disguise the substanceof transactions. These arrangementsfrequently involve more than one trust,each holding different assets of thetaxpayer (e.g., the taxpayer's business,business equipment, home, automobile,etc.). Some trusts may hold interests inother trusts, purport to involve charities,or are foreign trusts. Funds may flowfrom one trust to another trust by way ofrental agreements, fees for services,purchase agreements, and distributions.

Some of the abusive trustarrangements that have been identifiedinclude unincorporated business trusts (ororganizations), equipment or servicetrusts, family residence trusts, charitabletrusts, and final trusts. In each of thesetrusts, the original owner of the assetsthat are nominally subject to the trusteffectively retains the authority to causefinancial benefits of the trust to be directlyor indirectly returned or made available tothe owner. For example, the trustee maybe the promoter, or a relative or friend ofthe owner who simply carries out thedirections of the owner whether or notpermitted by the terms of the trust.

When trusts are used for legitimatebusiness, family, or estate planningpurposes, either the trust, the beneficiary,or the transferor to the trust will pay thetax on income generated by the trustproperty. Trusts cannot be used totransform a taxpayer's personal, living, oreducational expenses into deductibleitems, and will not seek to avoid taxliability by ignoring either the trueownership of income and assets or thetrue substance of transactions. Therefore,the tax results promised by the promotersof abusive trust arrangements are notallowable under the law, and theparticipants in and promoters of thesearrangements may be subject to civil orcriminal penalties in appropriate cases.

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For more details, including the legalprinciples that control the proper taxtreatment of these abusive trustarrangements, see Notice 97-24, 1997-1C.B. 409 or I.R.B. 97-16, 6.

Definitions

BeneficiaryA beneficiary includes an heir, a legatee,or a devisee.

Distributable Net Income (DNI)The income distribution deductionallowable to estates and trusts foramounts paid, credited, or required to bedistributed to beneficiaries is limited todistributable net income (DNI). Thisamount, which is figured on Schedule B,line 7, is also used to determine howmuch of an amount paid, credited, orrequired to be distributed to a beneficiarywill be includible in his or her grossincome.

Income, Deductions, and Credits inRespect of a DecedentIncome. When completing Form 1041,you must take into account any items thatare income in respect of a decedent(IRD).

In general, income in respect of adecedent is income that a decedent wasentitled to receive but that was notproperly includible in the decedent's finalincome tax return under the decedent'smethod of accounting.

IRD includes:● All accrued income of a decedent whoreported his or her income on the cashmethod of accounting;● Income accrued solely because of thedecedent's death in the case of adecedent who reported his or her incomeon the accrual method of accounting; and● Income to which the decedent had acontingent claim at the time of his or herdeath.

Some examples of IRD of a decedentwho kept his or her books on the cashmethod are:● Deferred salary payments that arepayable to the decedent's estate.● Uncollected interest on U.S. savingsbonds.● Proceeds from the completed sale offarm produce.● The portion of a lump-sum distributionto the beneficiary of a decedent's IRA thatequals the balance in the IRA at the timeof the owner's death. This includesunrealized appreciation and incomeaccrued to that date, less the aggregateamount of the owner's nondeductiblecontributions to the IRA. Such amountsare included in the beneficiary's grossincome in the tax year that the distributionis received.

The IRD has the same character itwould have had if the decedent lived andreceived such amount.Deductions and credits. The followingdeductions and credits, when paid by thedecedent's estate, are allowed on Form

1041 even though they were not allowableon the decedent's final income tax return:● Business expenses deductible undersection 162.● Interest deductible under section 163.● Taxes deductible under section 164.● Investment expenses described insection 212 (in excess of 2% of AGI).● Percentage depletion allowed undersection 611.● Foreign tax credit.

For more information, see section 691.

Income Required To Be DistributedCurrentlyIncome required to be distributedcurrently is income that is required underthe terms of the governing instrument andapplicable local law to be distributed in theyear it is received. The fiduciary must beunder a duty to distribute the incomecurrently, even if the actual distribution isnot made until after the close of the trust'stax year. See Regulations section1.651(a)-2.

FiduciaryA fiduciary is a trustee of a trust; or anexecutor, executrix, administrator,administratrix, personal representative, orperson in possession of property of adecedent's estate.Note: Any reference in these instructionsto “you” means the fiduciary of the estateor trust.

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

Who Must File

Decedent's EstateThe fiduciary (or one of the jointfiduciaries) must file Form 1041 for adomestic estate that has:

1. Gross income for the tax year of$600 or more, or

2. A beneficiary who is a nonresidentalien.

An estate is a domestic estate if it isnot a foreign estate. A foreign estate isone the income of which, from sourcesoutside the United States that is noteffectively connected with the conduct ofa U.S. trade or business, is not includiblein gross income. If you are the fiduciaryof a foreign estate, file Form 1040NR,U.S. Nonresident Alien Income TaxReturn, instead of Form 1041.

TrustThe fiduciary (or one of the jointfiduciaries) must file Form 1041 for adomestic trust taxable under section 641that has:

1. Any taxable income for the tax year,or

2. Gross income of $600 or more(regardless of taxable income), or

3. A beneficiary who is a nonresidentalien.

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

A trust is a domestic trust if:● A U.S. court is able to exercise primarysupervision over the administration of thetrust (court test), and● One or more U.S. persons have theauthority to control all substantialdecisions of the trust (control test).

Also treated as a domestic trust is atrust (other than a trust treated as whollyowned by the grantor) that:● Was in existence on August 20, 1996,● Was treated as a domestic trust onAugust 19, 1996, and● Elected to continue to be treated as adomestic trust.

See T.D. 8813, I.R.B. 1999-9, 34 formore information on the court and controltests. See also Notice 96-65, 1996-2 C.B.232, under which a trust (including awholly-owned grantor trust) may amendthe provisions of the trust in order to meetthe new statutory requirements.

A trust that is not a domestic trust istreated as a foreign trust. If you are thetrustee of a foreign trust, file Form1040NR instead of Form 1041. Also, aforeign trust with a U.S. owner generallymust file Form 3520-A, AnnualInformation Return of Foreign Trust Witha U.S. Owner.

If a domestic trust becomes a foreigntrust, it is treated under section 684 ashaving transferred all of its assets to aforeign trust, except to the extent agrantor or another person is treated as theowner of the trust when the trust becomesa foreign trust.

Special Rule for Certain RevocableTrustsSection 645 provides that the executor ofan estate and the trustee of a qualifiedrevocable trust can elect to treat the trustas part of the estate instead of filing aseparate Form 1041 for the trust. Theelection applies to all tax years of theestate ending after the date of thedecedent's death and before theapplicable date, as defined below. Oncemade, the election is irrevocable.Qualified revocable trusts. A qualifiedrevocable trust for this purpose is anytrust or portion of a trust that is treatedunder section 676 as owned by thedecedent whose estate is making theelection because of a power in the grantorof the trust to revoke the trust. For thispurpose, a power does not include anypower in the grantor that is treated as heldby the grantor because it is held by hisor her spouse.

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Applicable date. The applicable date iseither:● If the estate is required to file a Federalestate tax return, the date that is 6 monthsafter the date of the final determination ofthe Federal estate tax liability, or● If the estate is not required to file aFederal estate tax return, the date that is2 years after the date of the decedent'sdeath.Making the election. You make theelection by attaching a statement to Form1041. The original statement must beattached to Form 1041 filed by the duedate (including extensions) for the estatefor its first tax year. If the revocable trustmust file a Form 1041 for the tax yearending after the date of the decedent'sdeath, you must attach a copy of thestatement to that return.

See Rev. Proc. 98-13, I.R.B. 1998-4,21 for details of what you must include inthe statement and for additionalinformation on the election.

Bankruptcy EstateThe bankruptcy trustee or debtor-in-possession must file Form 1041 for theestate of an individual involved inbankruptcy proceedings under chapter 7or 11 of title 11 of the United States Codeif the estate has gross income for the taxyear of $6,350 or more. See Of SpecialInterest To Bankruptcy Trustees andDebtors-in-Possession on page 7 forother details.

Common Trust FundsDo not file Form 1041 for a common trustfund maintained by a bank. Instead, thefund may use Form 1065, U.S.Partnership Return of Income, for itsreturn. For more details, see section 584and Regulations section 1.6032-1.

Qualified Settlement FundsThe trustee of a designated or qualifiedsettlement fund must file Form 1120-SF,U.S. Income Tax Return for SettlementFunds, rather than Form 1041.

Electronic and MagneticMedia FilingQualified fiduciaries or transmitters maybe able to file Form 1041 and relatedschedules electronically or on magneticmedia. Tax return data may be filedelectronically using telephone lines or onmagnetic media using magnetic tape orfloppy diskette.

If you wish to do this, you must fileForm 9041, Application forElectronic/Magnetic Media Filing ofBusiness and Employee Benefit PlanReturns. If you file Form 1041electronically or on magnetic media, youmust also file Form 8453-F, U.S. Estateor Trust Income Tax Declaration andSignature for Electronic and MagneticMedia Filing. For more details, get Pub.1437, Procedures for Electronic andMagnetic Media Filing of U.S. Income TaxReturns for Estates and Trusts, Form

1041 for 1999, and Pub. 1438, FileSpecifications, Validation Criteria, andRecord Layouts for Electronic andMagnetic Media Filing of Estate and TrustReturns, Form 1041. To order these formsand publications, or for more informationon electronic and magnetic media filingof Form 1041, call the Magnetic MediaUnit at the Philadelphia Service Center at215-516-7533 (not a toll-free number), orwrite to:

Internal Revenue Service CenterAttention: Magnetic Media Unit–DP 11511601 Roosevelt Blvd.Philadelphia, PA 19154

When To FileFor calendar year estates and trusts, fileForm 1041 and Schedules K-1 on orbefore April 17, 2000. For fiscal yearestates and trusts, file Form 1041 by the15th day of the 4th month following theclose of the tax year. If the due date fallson a Saturday, Sunday, or legal holiday,file on the next business day. Forexample, an estate that has a tax yearthat ends on June 30, 2000, must fileForm 1041 by October 16, 2000.

Private Delivery ServicesYou can use certain private deliveryservices designated by the IRS to meetthe “timely mailing as timely filing/paying”rule for tax returns and payments. Themost recent list of designated privatedelivery services was published by theIRS in August 1999. The list includes onlythe following:● Airborne Express (Airborne): OvernightAir Express Service, Next AfternoonService, Second Day Service.● DHL Worldwide Express (DHL): DHL“Same Day” Service, DHL USAOvernight.● Federal Express (FedEx): FedExPriority Overnight, FedEx StandardOvernight, FedEx 2 Day.● United Parcel Service (UPS): UPS NextDay Air, UPS Next Day Air Saver, UPS2nd Day Air, UPS 2nd Day Air A.M.

The private delivery service can tell youhow to get written proof of the mailingdate.

Extension of Time To FileEstates. Use Form 2758, Application forExtension of Time To File Certain Excise,Income, Information, and Other Returns,to apply for an extension of time to file.Trusts. Use Form 8736, Application forAutomatic Extension of Time To File U.S.Return for a Partnership, REMIC, or forCertain Trusts, to request an automatic3-month extension of time to file.

If more time is needed, file Form 8800,Application for Additional Extension ofTime To File U.S. Return for aPartnership, REMIC, or for Certain Trusts,for an additional extension of up to 3months. To obtain this additionalextension of time to file, you must showreasonable cause for the additional timeyou are requesting. Form 8800 must be

filed by the extended due date for Form1041.

Period CoveredFile the 1999 return for calendar year1999 and fiscal years beginning in 1999and ending in 2000. If the return is for afiscal year or a short tax year (less than12 months), fill in the tax year space atthe top of the form.

The 1999 Form 1041 may also be usedfor a tax year beginning in 2000 if:

1. The estate or trust has a tax yearof less than 12 months that begins andends in 2000; and

2. The 2000 Form 1041 is notavailable by the time the estate or trust isrequired to file its tax return. However, theestate or trust must show its 2000 taxyear on the 1999 Form 1041 andincorporate any tax law changes that areeffective for tax years beginning afterDecember 31, 1999.

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

If you are located in

Please mail to thefollowing InternalRevenue Service

Center

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

Holtsville, NY 00501

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

Andover, MA 05501

Florida, Georgia, SouthCarolina Atlanta, GA 39901

Indiana, Kentucky, Michigan,Ohio, West Virginia Cincinnati, OH 45999

Kansas, New Mexico,Oklahoma, Texas Austin, TX 73301

Alaska, Arizona, California(counties of Alpine, Amador,Butte, Calaveras, Colusa,Contra Costa, Del Norte, ElDorado, Glenn, Humboldt,Lake, Lassen, Marin,Mendocino, Modoc, Napa,Nevada, Placer, Plumas,Sacramento, San Joaquin,Shasta, Sierra, Siskiyou,Solano, Sonoma, Sutter,Tehama, Trinity, Yolo, andYuba), Colorado, Idaho,Montana, Nebraska, Nevada,North Dakota, Oregon, SouthDakota, Utah, Washington,Wyoming

Ogden, UT 84201

California (all other counties),Hawaii Fresno, CA 93888

Illinois, Iowa, Minnesota,Missouri, Wisconsin Kansas City, MO 64999

Alabama, Arkansas,Louisiana, Mississippi, NorthCarolina, Tennessee

Memphis, TN 37501

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

Philadelphia, PA 19255

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

Who Must Sign

FiduciaryThe fiduciary, or an authorizedrepresentative, must sign Form 1041.

A financial institution that submittedestimated tax payments for trusts forwhich it is the trustee must enter itsemployer identification number (EIN) inthe space provided for the EIN of thefiduciary. Do not enter the EIN of the trust.For this purpose, a financial institution isone that maintains a Treasury Tax andLoan account. If you are an attorney orother individual functioning in a fiduciarycapacity, leave this space blank. DO NOTenter your individual social securitynumber (SSN).

If you, as fiduciary, fill in Form 1041,leave the Paid Preparer's space blank. Ifsomeone prepares this return and doesnot charge you, that person should notsign the return.

Paid PreparerGenerally, anyone who is paid to preparea tax return must sign the return and fillin the other blanks in the Paid Preparer'sUse Only area of the return.

The person required to sign the returnmust complete the required preparerinformation and:● Sign it in the space provided for thepreparer's signature. A facsimilesignature is acceptable if certainconditions are met. See Regulationssection 1.6695-1(b)(4)(iv) for details.● Give you a copy of the return in additionto the copy to be filed with the IRS.

Accounting MethodsFigure taxable income using the methodof accounting regularly used in keepingthe estate's or trust's books and records.Generally, permissible methods includethe cash method, the accrual method, orany other method authorized by theInternal Revenue Code. In all cases, themethod used must clearly reflect income.

Generally, the estate or trust maychange its accounting method (for incomeas a whole or for any material item) onlyby getting consent on Form 3115,Application for Change in AccountingMethod. For more information, see Pub.538, Accounting Periods and Methods.

Accounting PeriodsFor a decedent's estate, the moment ofdeath determines the end of thedecedent's tax year and the beginning ofthe estate's tax year. As executor oradministrator, you choose the estate's taxperiod when you file its first income taxreturn. The estate's first tax year may beany period of 12 months or less that endson the last day of a month. If you selectthe last day of any month other thanDecember, you are adopting a fiscal taxyear.

To change the accounting period of anestate, get Form 1128, Application ToAdopt, Change, or Retain a Tax Year.

Generally, a trust must adopt acalendar year. The following trusts areexempt from this requirement:● A trust that is exempt from tax undersection 501(a);● A charitable trust described in section4947(a)(1); and● A trust that is treated as wholly ownedby a grantor under the rules of sections671 through 679.

Rounding Off to WholeDollarsYou may show the money items on thereturn and accompanying schedules aswhole-dollar amounts. To do so, dropamounts less than 50 cents and increaseany amounts from 50 to 99 cents to thenext dollar.

Estimated TaxGenerally, an estate or trust must payestimated income tax for 2000 if it expectsto owe, after subtracting any withholdingand credits, at least $1,000 in tax, and itexpects the withholding and credits to beless than the smaller of:

1. 90% of the tax shown on the 2000tax return, or

2. 100% of the tax shown on the 1999tax return (108.6% of that amount if theestate's or trust's adjusted gross incomeon that return is more than $150,000, andless than 2/3 of gross income for 1999 or2000 is from farming or fishing).

However, if a return was not filed for1999 or that return did not cover a full 12months, item 2 does not apply.

For this purpose, include householdemployment taxes in the tax shown on thetax return, but only if either of thefollowing is true:● The estate or trust will have Federalincome tax withheld for 2000 (see theinstructions on page 15 for line 24e), or● The estate or trust would be required tomake estimated tax payments for 2000even if it did not include householdemployment taxes when figuringestimated tax.

ExceptionsEstimated tax payments are not requiredfrom:

1. An estate of a domestic decedentor a domestic trust that had no tax liabilityfor the full 12-month 1999 tax year;

2. A decedent's estate for any tax yearending before the date that is 2 yearsafter the decedent's death; or

3. A trust that was treated as ownedby the decedent if the trust will receive theresidue of the decedent's estate under thewill (or if no will is admitted to probate, thetrust primarily responsible for payingdebts, taxes, and expenses ofadministration) for any tax year endingbefore the date that is 2 years after thedecedent's death.

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

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

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

See the instructions on page 15 for line24b for more details.

Interest and Penalties

InterestInterest is charged on taxes not paid bythe due date, even if an extension of timeto file is granted.

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

Late Filing of ReturnThe law provides a penalty of 5% amonth, or part of a month, up to amaximum of 25%, for each month thereturn is not filed. The penalty is imposedon the net amount due. If the return ismore than 60 days late, the minimumpenalty is the smaller of $100 or the taxdue. The penalty will not be imposed ifyou can show that the failure to file ontime was due to reasonable cause. If thefailure is due to reasonable cause, attachan explanation to the return.

If you are located in

Please mail to thefollowing InternalRevenue Service

Center

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

Atlanta, GA 39901

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

Austin, TX 73301

Indiana, Kentucky,Michigan, Ohio, WestVirginia

Cincinnati, OH 45999

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

Fresno, CA 93888

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

Holtsville, NY 00501

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

Kansas City, MO 64999

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

Philadelphia, PA 19255

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Late Payment of TaxGenerally, the penalty for not paying taxwhen due is 1/2 of 1% of the unpaidamount for each month or part of a monthit remains unpaid. The maximum penaltyis 25% of the unpaid amount. The penaltyis imposed on the net amount due. Anypenalty is in addition to interest chargeson late payments.

TIPIf you include interest or either ofthese penalties with your payment,identify and enter these amounts in

the bottom margin of Form 1041, page 1.Do not include the interest or penaltyamount in the balance of tax due online 27.

Failure To Provide InformationTimelyYou must provide Schedule K-1 (Form1041), on or before the day you arerequired to file Form 1041, to eachbeneficiary who receives a distribution ofproperty or an allocation of an item of theestate.

For each failure to provide ScheduleK-1 to a beneficiary when due and eachfailure to include on Schedule K-1 all theinformation required to be shown (or theinclusion of incorrect information), a $50penalty may be imposed with regard toeach Schedule K-1 for which a failureoccurs. The maximum penalty is$100,000 for all such failures during acalendar year. If the requirement to reportinformation is intentionally disregarded,each $50 penalty is increased to $100 or,if greater, 10% of the aggregate amountof items required to be reported, and the$100,000 maximum does not apply.

The penalty will not be imposed if thefiduciary can show that not providinginformation timely was due to reasonablecause and not due to willful neglect.

Underpaid Estimated TaxIf the fiduciary underpaid estimated tax,use Form 2210, Underpayment ofEstimated Tax by Individuals, Estates,and Trusts, to figure any penalty. Enterthe amount of any penalty on line 26,Form 1041.

Trust Fund Recovery PenaltyThis penalty may apply if certain excise,income, social security, and Medicaretaxes that must be collected or withheldare not collected or withheld, or thesetaxes are not paid. These taxes aregenerally reported on Forms 720, 941,943, or 945. The trust fund recoverypenalty may be imposed on all personswho are determined by the IRS to havebeen responsible for collecting,accounting for, and paying over thesetaxes, and who acted willfully in not doingso. The penalty is equal to the unpaidtrust fund tax. See the instructions forForm 720, Pub. 15 (Circular E),Employer's Tax Guide, or Pub. 51(Circular A), Agricultural Employer's TaxGuide, for more details, including thedefinition of responsible persons.

Other PenaltiesOther penalties can be imposed fornegligence, substantial understatementof tax, and fraud. See Pub. 17, YourFederal Income Tax, for details on thesepenalties.

Other Forms That May BeRequiredForms W-2 and W-3, Wage and TaxStatement; and Transmittal of Wage andTax Statements.Form 56, Notice Concerning FiduciaryRelationship.Form 706, United States Estate (andGeneration-Skipping Transfer) TaxReturn; or Form 706-NA, United StatesEstate (and Generation-SkippingTransfer) Tax Return, Estate ofnonresident not a citizen of the UnitedStates.Form 706-GS(D), Generation-SkippingTransfer Tax Return For Distributions.Form 706-GS(D-1), Notification ofDistribution From a Generation-SkippingTrust.Form 706-GS(T), Generation-SkippingTransfer Tax Return for Terminations.Form 720, Quarterly Federal Excise TaxReturn. Use Form 720 to reportenvironmental excise taxes,communications and air transportationtaxes, fuel taxes, luxury tax on passengervehicles, manufacturers' taxes, shippassenger tax, and certain other excisetaxes.Caution: See Trust Fund RecoveryPenalty above.Form 926, Return by a U.S. Transferorof Property to a Foreign Corporation. Usethis form to report certain informationrequired under section 6038B.Form 940 or Form 940-EZ, Employer'sAnnual Federal Unemployment (FUTA)Tax Return. The estate or trust may beliable for FUTA tax and may have to fileForm 940 or 940-EZ if it paid wages of$1,500 or more in any calendar quarterduring the calendar year (or the precedingcalendar year) or one or more employeesworked for the estate or trust for somepart of a day in any 20 different weeksduring the calendar year (or the precedingcalendar year).Form 941, Employer's Quarterly FederalTax Return. Employers must file this formquarterly to report income tax withheld onwages and employer and employee socialsecurity and Medicare taxes. Agriculturalemployers must file Form 943,Employer's Annual Tax Return forAgricultural Employees, instead of Form941, to report income tax withheld andemployer and employee social securityand Medicare taxes on farmworkers.Caution: See Trust Fund RecoveryPenalty above.Form 945, Annual Return of WithheldFederal Income Tax. Use this form toreport income tax withheld fromnonpayroll payments, including pensions,annuities, IRAs, gambling winnings, andbackup withholding.

Caution: See Trust Fund RecoveryPenalty above.Form 1040, U.S. Individual Income TaxReturn.Form 1040NR, U.S. Nonresident AlienIncome Tax Return.Form 1041-A, U.S. Information Return—Trust Accumulation of CharitableAmounts.Forms 1042 and 1042-S, AnnualWithholding Tax Return for U.S. SourceIncome of Foreign Persons; and ForeignPerson's U.S. Source Income Subject toWithholding. Use these forms to reportand transmit withheld tax on payments ordistributions made to nonresident alienindividuals, foreign partnerships, orforeign corporations to the extent suchpayments or distributions constitute grossincome from sources within the UnitedStates that is not effectively connectedwith a U.S. trade or business. For moreinformation, see sections 1441 and 1442,and Pub. 515, Withholding of Tax onNonresident Aliens and ForeignCorporations.Forms 1099-A, B, INT, LTC, MISC, MSA,OID, R, and S. You may have to filethese information returns to reportacquisitions or abandonments of securedproperty; proceeds from broker and barterexchange transactions; interestpayments; payments of long-term careand accelerated death benefits;miscellaneous income payments;distributions from a medical savingsaccount (MSA) or Medicare + ChoiceMSA; original issue discount; distributionsfrom pensions, annuities, retirement orprofit-sharing plans, IRAs, insurancecontracts, etc.; and proceeds from realestate transactions.

Also, use certain of these returns toreport amounts received as a nominee onbehalf of another person, except amountsreported to beneficiaries on Schedule K-1(Form 1041).Form 8275, Disclosure Statement. FileForm 8275 to disclose items or positions,except those contrary to a regulation, thatare not otherwise adequately disclosedon a tax return. The disclosure is made toavoid parts of the accuracy-relatedpenalty imposed for disregard of rules orsubstantial understatement of tax. Form8275 is also used for disclosures relatingto preparer penalties for understatementsdue to unrealistic positions or disregardof rules.Form 8275-R, Regulation DisclosureStatement, is used to disclose any itemon a tax return for which a position hasbeen taken that is contrary to Treasuryregulations.Forms 8288 and 8288-A, U.S.Withholding Tax Return for Dispositionsby Foreign Persons of U.S. Real PropertyInterests; and Statement of Withholdingon Dispositions by Foreign Persons ofU.S. Real Property Interests. Use theseforms to report and transmit withheld taxon the sale of U.S. real property by aforeign person. Also, use these forms toreport and transmit tax withheld fromamounts distributed to a foreign

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beneficiary from a “U.S. real propertyinterest account” that a domestic estateor trust is required to establish underRegulations section 1.1445-5(c)(1)(iii).Form 8300, Report of Cash PaymentsOver $10,000 Received in a Trade orBusiness. Generally, this form is used toreport the receipt of more than $10,000 incash or foreign currency in onetransaction (or a series of relatedtransactions).Form 8865, Return of U.S. Persons WithRespect to Certain Foreign Partnerships.The estate or trust may have to file thisform if it contributed property after August5, 1997, to a foreign partnership inexchange for a partnership interest and(a) immediately after the contribution theestate or trust owned, either directly orindirectly, at least a 10% interest in theforeign partnership or (b) the fair marketvalue of the property contributed to theforeign partnership in exchange for thepartnership interest, when added to othercontributions of property made to thepartnership during the preceding12-month period, exceeds $100,000.Also, the estate or trust may have to fileForm 8865 to report certain dispositionsby the foreign partnership of propertypreviously contributed to it by the estateor trust if the estate or trust was still apartner at the time of disposition. Formore details, including penalties that mayapply, see Form 8865 and its separateinstructions.

Assembly and AttachmentsAssemble any schedules, forms and/orattachments behind Form 1041 in thefollowing order:

1. Schedule D (Form 1041),2. Schedule H (Form 1040),3. Form 4136,4. All other schedules and forms, and5. All attachments.

AttachmentsIf you need more space on the forms orschedules, attach separate sheets. Usethe same size and format as on theprinted forms. But show the totals onthe printed forms.

Attach these separate sheets after allthe schedules and forms. Enter theestate's or trust's EIN on each sheet.

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

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

Of Special Interest toBankruptcy Trustees andDebtors-in-Possession

Taxation of Bankruptcy Estates ofan IndividualA bankruptcy estate is a separate taxableentity created when an individual debtorfiles a petition under either chapter 7 or11 of title 11 of the U.S. Code. The estateis administered by a trustee or adebtor-in-possession. If the case is laterdismissed by the bankruptcy court, thedebtor is treated as if the bankruptcypetition had never been filed. Thisprovision does NOT apply to partnershipsor corporations.

Who Must FileEvery trustee (or debtor-in-possession)for an individual's bankruptcy estate underchapter 7 or 11 of title 11 of the U.S. Codemust file a return if the bankruptcy estatehas gross income of $6,350 or more fortax years beginning in 1999.

Failure to do so may result in anestimated Request for AdministrativeExpenses being filed by the IRS in thebankruptcy proceeding or a motion tocompel filing of the return.Important: The filing of a tax return forthe bankruptcy estate does not relieve theindividual debtor of his or her (or their)individual tax obligations.

Employer Identification NumberEvery bankruptcy estate of an individualrequired to file a return must have its ownEIN. The SSN of the individual debtorcannot be used as the EIN for thebankruptcy estate.

Accounting PeriodA bankruptcy estate is allowed to have afiscal year. The period can be no longerthan 12 months.

When To FileFile Form 1041 on or before the 15th dayof the 4th month following the close of thetax year. Use Form 2758 to apply for anextension of time to file.

Disclosure of Return InformationUnder section 6103(e)(5), tax returns ofindividual debtors who have filed forbankruptcy under chapters 7 or 11 of title11 are, upon written request, open toinspection by or disclosure to the trustee.

The returns subject to disclosure to thetrustee are those for the year thebankruptcy begins and prior years. UseForm 4506, Request for Copy orTranscript of Tax Form, to request copiesof the individual debtor's tax returns.

If the bankruptcy case was notvoluntary, disclosure cannot be madebefore the bankruptcy court has enteredan order for relief, unless the court rulesthat the disclosure is needed fordetermining whether relief should beordered.

Transfer of Tax Attributes From theIndividual Debtor to theBankruptcy EstateThe bankruptcy estate succeeds to thefollowing tax attributes of the individualdebtor:

1. Net operating loss (NOL)carryovers;

2. Charitable contributions carryovers;3. Recovery of tax benefit items;4. Credit carryovers;5. Capital loss carryovers;6. Basis, holding period, and

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 CreditsUnder section 1398(c), the taxableincome of the bankruptcy estate generallyis figured in the same manner as anindividual. The gross income of thebankruptcy estate includes any incomeincluded in property of the estate asdefined in Bankruptcy Code section 541.Also included is gain from the sale ofproperty. To figure gain, the trustee ordebtor-in-possession must determine thecorrect basis of the property.

To determine whether any amount paidor incurred by the bankruptcy estate isallowable as a deduction or credit, or istreated as wages for employment taxpurposes, treat the amount as if it werepaid or incurred by the individual debtorin the same trade or business or otheractivity the debtor engaged in before thebankruptcy proceedings began.Administrative expenses. Thebankruptcy estate is allowed a deductionfor any administrative expense allowedunder section 503 of title 11 of the U.S.Code, and any fee or charge assessedunder chapter 123 of title 28 of the U.S.Code, to the extent not disallowed underan Internal Revenue Code provision (e.g.,section 263, 265, or 275).Administrative expense loss. Whenfiguring a net operating loss, nonbusinessdeductions (including administrativeexpenses) are limited under section172(d)(4) to the bankruptcy estate'snonbusiness income. The excessnonbusiness deductions are anadministrative expense loss that may becarried back to each of the 3 precedingtax years and forward to each of the 7succeeding tax years of the bankruptcyestate. The amount of an administrativeexpense loss that may be carried to anytax year is determined after the netoperating loss deductions allowed for thatyear. An administrative expense loss isallowed only to the bankruptcy estate andcannot be carried to any tax year of theindividual debtor.Carryback of net operating losses andcredits. If the bankruptcy estate itselfincurs a net operating loss (apart fromlosses carried forward to the estate fromthe individual debtor), it can carry back itsnet operating losses not only to previous

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tax years of the bankruptcy estate, butalso to tax years of the individual debtorprior to the year in which the bankruptcyproceedings began. Excess credits, suchas the foreign tax credit, also may becarried back to pre-bankruptcy years ofthe individual debtor.Exemption. For tax years beginning in1999, a bankruptcy estate is allowed apersonal exemption of $2,750.Standard deduction. For tax yearsbeginning in 1999, a bankruptcy estatethat does not itemize deductions isallowed a standard deduction of $3,600.Discharge of indebtedness. In a title11 case, gross income does not includeamounts that normally would be includedin gross income resulting from thedischarge of indebtedness. However, anyamounts excluded from gross incomemust be applied to reduce certain taxattributes in a certain order. Attach Form982, Reduction of Tax Attributes Due toDischarge of Indebtedness, to show thereduction of tax attributes.

Tax Rate ScheduleFigure the tax for the bankruptcy estateusing the tax rate schedule below. Enterthe tax on Form 1040, line 40.

Prompt Determination of TaxLiabilityTo request a prompt determination of thetax liability of the bankruptcy estate, thetrustee or debtor-in-possession must filea written application for the determinationwith the IRS District Director for thedistrict in which the bankruptcy case ispending. The application must besubmitted in duplicate and executedunder the penalties of perjury. Thetrustee or debtor-in-possession mustsubmit with the application an exact copyof the return (or returns) filed by thetrustee with the IRS for a completed taxperiod, and a statement of the name andlocation of the office where the return wasfiled. The envelope should be marked,“Personal Attention of the SpecialProcedures Function (BankruptcySection). DO NOT OPEN INMAILROOM.”

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

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

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

Enter on Form 1041, line 23, the totaltax from line 56 of Form 1040. Completelines 24 through 29 of Form 1041, andsign and date it.

Specific Instructions

Name of Estate or TrustCopy the exact name of the estate or trustfrom the Form SS-4, Application forEmployer Identification Number, that youused to apply for the EIN.

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

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

If the Post Office does not deliver mailto the street address and the fiduciary hasa P.O. box, show the box number insteadof the street address.

If you change your address after filingForm 1041, use Form 8822, Change ofAddress, to notify the IRS.

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

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

Simple TrustA trust may qualify as a simple trust if:

1. The trust instrument requires thatall income must be distributed currently;

2. The trust instrument does notprovide that any amounts are to be paid,permanently set aside, or used forcharitable purposes; and

3. The trust does not distributeamounts allocated to the corpus of thetrust.

Complex TrustA complex trust is any trust that does notqualify as a simple trust as explainedabove.

Grantor Type TrustA grantor type trust is a legal trust underapplicable state law that is not recognizedas a separate taxable entity for incometax purposes because the grantor or othersubstantial owners have not relinquishedcomplete dominion and control over thetrust.

Generally, for transfers made in trustafter March 1, 1986, the grantor is treatedas the owner of any portion of a trust inwhich he or she has a reversionaryinterest in either the income or corpustherefrom, if, as of the inception of thatportion of the trust, the value of thereversionary interest is more than 5% ofthe value of that portion. Also, the grantoris treated as holding any power or interestthat was held by either the grantor'sspouse at the time that the power orinterest was created or who became thegrantor's spouse after the creation of thatpower or interest.

CAUTION!

The following instructions applyonly to grantor type trusts that arenot using an optional filing method,

explained later.Report on Form 1041 only the part of

the income that is taxable to the trust. Donot report on Form 1041 the income thatis taxable to the grantor or anotherperson. Instead, attach a separate sheetto report:● The income of the trust that is taxableto the grantor or another person undersections 671 through 678;● The name, identifying number, andaddress of the person(s) to whom theincome is taxable; and● Any deductions or credits applied to thisincome.

The income taxable to the grantor oranother person under sections 671through 678 and the deductions andcredits applied to the income must bereported by that person on his or her ownincome tax return.Mortgage pools. The trustee of amortgage pool, such as the FederalNational Mortgage Association, collectsprincipal and interest payments on eachmortgage and makes distributions to thecertificate holders. Each pool isconsidered a grantor type trust, and eachcertificate holder is treated as the ownerof an undivided interest in the entire trustunder the grantor trust rules. Certificateholders must report their proportionateshare of the mortgage interest and otheritems of income on their individual taxreturns.

If taxable incomeis:

Over— But notover— The tax is:

Of theamountover—

$0 $21,525 15% $021,525 52,025 $3,228.75 + 28% 21,52552,025 79,275 11,768.75 + 31% 52,02579,275 141,575 20,216.25 + 36% 79,275

141,575 ------ 42,644.25 + 39.6% 141,575

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Pre-need funeral trusts. Thepurchasers of pre-need funeral servicesare the grantors and the owners ofpre-need funeral trusts established understate laws. See Rev. Rul. 87-127, 1987-2C.B. 156. However, the trustees ofpre-need funeral trusts can elect to file thereturn and pay the tax for qualified funeraltrusts. For more information, see Form1041-QFT, U.S. Income Tax Return forQualified Funeral Trusts.Nonqualified deferred compensationplans. Taxpayers may adopt andmaintain grantor trusts in connection withnonqualified deferred compensation plans(sometimes referred to as “rabbi trusts”).Rev. Proc. 92-64, 1992-2 C.B. 422,provides a “model grantor trust” for use inrabbi trust arrangements. The procedurealso provides guidance for requestingrulings on the plans that use these trusts.

Optional Filing Methods for CertainGrantor Type TrustsGenerally, for a trust all of which is treatedas owned by one or more grantors orother persons, the trustee may use oneof the following three optional methods toreport instead of filing Form 1041.

Method 1. For a trust treated as ownedby one grantor or by one other person, thetrustee must give all payers of incomeduring the tax year the name andtaxpayer identification number (TIN) of thegrantor or other person treated as theowner of the trust and the address of thetrust. This method may be used only if theowner of the trust provides the trusteewith a signed Form W-9, Request forTaxpayer Identification Number andCertification. In addition, unless thegrantor or other person treated as ownerof the trust is the trustee or a co-trusteeof the trust, the trustee must give thegrantor or other person treated as ownerof the trust a statement that:● Shows all items of income, deduction,and credit of the trust;● Identifies the payer of each item ofincome;● Explains how the grantor or otherperson treated as owner of the trust takesthose items into account when figuring thegrantor's or other person's taxable incomeor tax; and● Informs the grantor or other persontreated as the owner of the trust thatthose items must be included whenfiguring taxable income and credits on hisor her income tax return.Important: Grantor trusts that have notapplied for an EIN and are going to fileunder Method 1 do not need an EIN forthe trust as long as they continue to reportunder that method.

Method 2. For a trust treated as ownedby one grantor or by one other person, thetrustee must give all payers of incomeduring the tax year the name, address,and TIN of the trust. The trustee alsomust file with the IRS the appropriateForms 1099 to report the income or grossproceeds paid to the trust during the taxyear that shows the trust as the payer and

the grantor or other person treated asowner as the payee. The trustee mustreport each type of income in theaggregate and each item of grossproceeds separately. The due date forany Forms 1099 required to be filed withthe IRS by a trustee under this method isFebruary 28, 2000 (March 31, 2000, iffiled electronically).

In addition, unless the grantor or otherperson treated as owner of the trust is thetrustee or a co-trustee of the trust, thetrustee must give the grantor or otherperson treated as owner of the trust astatement that:● Shows all items of income, deduction,and credit of the trust;● Explains how the grantor or otherperson treated as owner of the trust takesthose items into account when figuring thegrantor's or other person's taxable incomeor tax; and● Informs the grantor or other persontreated as the owner of the trust thatthose items must be included whenfiguring taxable income and credits on hisor her income tax return. This statementsatisfies the requirement to give therecipient copies of the Forms 1099 filedby the trustee.

Method 3. For a trust treated as ownedby two or more grantors or other persons,the trustee must give all payers of incomeduring the tax year the name, address,and TIN of the trust. The trustee alsomust file with the IRS the appropriateForms 1099 to report the income or grossproceeds paid to the trust by all payersduring the tax year attributable to the partof the trust treated as owned by eachgrantor or other person, showing the trustas the payer and each grantor or otherperson treated as owner of the trust asthe payee. The trustee must report eachtype of income in the aggregate and eachitem of gross proceeds separately. Thedue date for any Forms 1099 required tobe filed with the IRS by a trustee underthis method is February 28, 2000 (March31, 2000, if filed electronically).

In addition, the trustee must give eachgrantor or other person treated as ownerof the trust a statement that:● Shows all items of income, deduction,and credit of the trust attributable to thepart of the trust treated as owned by thegrantor or other person;● Explains how the grantor or otherperson treated as owner of the trust takesthose items into account when figuring thegrantor's or other person's taxable incomeor tax; and● Informs the grantor or other persontreated as the owner of the trust thatthose items must be included whenfiguring taxable income and credits on hisor her income tax return. This statementsatisfies the requirement to give therecipient copies of the Forms 1099 filedby the trustee.Exceptions. The following trusts cannotreport using the optional filing methods:

1. A common trust fund (as defined insection 584(a)).

2. A foreign trust or a trust that hasany of its assets located outside theUnited States.

3. A qualified subchapter S trust (asdefined in section 1361(d)(3)).

4. A trust all of which is treated asowned by one grantor or one other personwhose tax year is other than a calendaryear.

5. A trust all of which is treated asowned by one or more grantors or otherpersons, one of which is not a U.S.person.

6. A trust all of which is treated asowned by one or more grantors or otherpersons if at least one grantor or otherperson is an exempt recipient forinformation reporting purposes, unless atleast one grantor or other person is notan exempt recipient and the trusteereports without treating any of thegrantors or other persons as exemptrecipients.Changing filing methods. A trustee whopreviously had filed Form 1041 canchange to one of the optional methods byfiling a final Form 1041 for the tax yearthat immediately precedes the first taxyear for which the trustee elects to reportunder one of the optional methods. On thefront of the final Form 1041, the trusteemust write “Pursuant to section1.671-4(g), this is the final Form 1041 forthis grantor trust,” and check the “Finalreturn” box in item F.

For more details on changing reportingmethods, including changes from oneoptional method to another, seeRegulations section 1.671-4(g).Backup withholding. Generally, agrantor trust is considered a payor ofreportable payments received by the trustfor purposes of backup withholding. If thetrust has 10 or fewer grantors, areportable payment made to the trust istreated as a reportable payment of thesame kind made to the grantors on thedate the trust received the payment. If thetrust has more than 10 grantors, areportable payment made to the trust istreated as a payment of the same kindmade by the trust to each grantor in anamount equal to the distribution made toeach grantor on the date the grantor ispaid or credited. The trustee mustwithhold 31% of reportable paymentsmade to any grantor who is subject tobackup withholding. For more information,see section 3406 and TemporaryRegulations section 35a.9999-2, Q&A 20.

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

For more information, see section 1398and Pub. 908, Bankruptcy Tax Guide.

Pooled Income FundA pooled income fund is a split-interesttrust with a remainder interest for a publiccharity and a life income interest retained

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by the donor or for another person. Theproperty is held in a pool with otherpooled income fund property and does notinclude any tax-exempt securities. Theincome for a retained life interest isfigured using the yearly rate of returnearned by the trust. See section 642(c)and the related regulations for moreinformation.

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

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

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

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

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

C. Employer IdentificationNumberEvery estate or trust that is required to fileForm 1041 must have an EIN. To applyfor one, use Form SS-4. Form SS-4 hasinformation on how to apply for an EIN bymail or by telephone. If the estate or trusthas not received its EIN by the time thereturn is due, write “Applied for” in thespace for the EIN. See Pub. 583, Startinga Business and Keeping Records, formore information.

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

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

E. Nonexempt Charitable andSplit-Interest Trusts

Section 4947(a)(1) TrustCheck this box if the trust is a nonexemptcharitable trust within the meaning ofsection 4947(a)(1). A nonexemptcharitable trust is a trust that is notexempt from tax under section 501(a); all

of the unexpired interests are devoted toone or more charitable purposesdescribed in section 170(c)(2)(B); and forwhich a deduction was allowed undersection 170 (for individual taxpayers) orsimilar Code section for personal holdingcompanies, foreign personal holdingcompanies, or estates or trusts (includinga deduction for estate or gift taxpurposes).

Not a Private FoundationCheck this box if the charitable trust is nottreated as a private foundation undersection 509. For more information, seeRegulations section 53.4947-1.

If a nonexempt charitable trust is nottreated as though it were a privatefoundation, the fiduciary must file, inaddition to Form 1041, Form 990 (orForm 990-EZ ), Return of OrganizationExempt From Income Tax, and ScheduleA (Form 990), Organization ExemptUnder Section 501(c)(3), if the trust'sgross receipts are normally more than$25,000.

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

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

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

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

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

If a nonexempt charitable trust issubject to any of the private foundationexcise taxes, then it must also file Form4720, Return of Certain Excise Taxes onCharities and Other Persons UnderChapters 41 and 42 of the Internal

Revenue Code. None of the privatefoundation taxes paid by the trust can betaken as a deduction on Form 1041.

If a nonexempt charitable trust istreated as though it were a privatefoundation, and it has no taxable incomeunder Subtitle A, it may file Form 990-PFinstead of Form 1041 to meet its section6012 filing requirement.

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

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

On an attached sheet explain thereason for the amendments and identifythe lines and amounts being changed onthe amended return.

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

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

If, on the final return, there are excessdeductions, an unused capital losscarryover, or a net operating losscarryover, see the instructions forSchedule K-1, lines 13a through 13e, onpage 32.

G. Pooled Mortgage AccountIf you bought a pooled mortgage accountduring the year, and still have that poolat the end of the tax year, check the“Bought” box and enter the date ofpurchase. If you sold a pooled mortgageaccount that was purchased during this,or a previous, tax year, check the “Sold”box and enter the date of sale. If youneither bought nor sold a pooledmortgage account, skip this item.

Income

Special Rule for Blind TrustIf you are reporting income from aqualified blind trust (under the Ethics inGovernment Act of 1978), do not identify

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the payer of any income to the trust butcomplete the rest of the return asprovided in the instructions. Also write“Blind Trust” at the top of page 1.

Line 1—Interest IncomeReport the estate's or trust's share of alltaxable interest income that was receivedduring the tax year. Examples of taxableinterest include interest from:● Accounts (including certificates ofdeposit and money market accounts) withbanks, credit unions, and thrifts.● Notes, loans, and mortgages.● U.S. Treasury bills, notes, and bonds.● U.S. savings bonds.● Original issue discount.● Income received as a regular interestholder of a real estate mortgageinvestment conduit (REMIC).

For taxable bonds acquired after 1987,amortizable bond premium is treated asan offset to the interest income insteadof as a separate interest deduction. SeePub. 550.

For the year of the decedent's death,Forms 1099-INT issued in the decedent'sname may include interest income earnedafter the date of death that should bereported on the income tax return of thedecedent's estate. When preparing thedecedent's final income tax return, reporton line 1 of Schedule B (Form 1040) orSchedule 1 (Form 1040A) the totalinterest shown on Form 1099-INT. Underthe last entry on line 1, subtotal all theinterest reported on line 1. Below thesubtotal, write “Form 1041” and the nameand address shown on Form 1041 for thedecedent's estate. Also, show the part ofthe interest reported on Form 1041 andsubtract it from the subtotal.

Line 2—Ordinary DividendsReport the estate's or trust's share of allordinary dividends received during the taxyear.

For the year of the decedent's death,Forms 1099-DIV issued in the decedent'sname may include dividends earned afterthe date of death that should be reportedon the income tax return of the decedent'sestate. When preparing the decedent'sfinal income tax return, report on line 5 ofSchedule B (Form 1040) or Schedule 1(Form 1040A) the ordinary dividendsshown on Form 1099-DIV. Under the lastentry on line 5, subtotal all the dividendsreported on line 5. Below the subtotal,write “Form 1041” and the name andaddress shown on Form 1041 for thedecedent's estate. Also, show the part ofthe ordinary dividends reported on Form1041 and subtract it from the subtotal.Note: Report capital gain distributions onSchedule D (Form 1041), line 9.

Line 3—Business Income or (Loss)If the estate or trust operated a business,report the income and expenses onSchedule C (Form 1040), Profit or LossFrom Business (or Schedule C-EZ (Form1040), Net Profit From Business). Enterthe net profit or (loss) from Schedule C (orSchedule C-EZ) on line 3.

Line 4—Capital Gain or (Loss)Enter the gain from Schedule D (Form1041), Part III, line 16, column (3); or theloss from Part IV, line 17.

CAUTION!

Do not substitute Schedule D(Form 1040) for Schedule D (Form1041).

Line 5—Rents, Royalties,Partnerships, Other Estates andTrusts, etc.Use Schedule E (Form 1040),Supplemental Income and Loss, to reportthe estate's or trust's share of income or(losses) from rents, royalties,partnerships, S corporations, otherestates and trusts, and REMICs. Enter thenet profit or (loss) from Schedule E on line5. See the instructions for Schedule E(Form 1040) for reporting requirements.

If the estate or trust received aSchedule K-1 from a partnership, Scorporation, or other flow-through entity,use the corresponding lines on Form 1041to report the interest, dividends, capitalgains, etc., from the flow-through entity.

Line 6—Farm Income or (Loss)If the estate or trust operated a farm, useSchedule F (Form 1040), Profit or LossFrom Farming, to report farm income andexpenses. Enter the net profit or (loss)from Schedule F on line 6.

Line 7—Ordinary Gain or (Loss)Enter from line 18, Form 4797, Sales ofBusiness Property, the ordinary gain orloss from the sale or exchange of propertyother than capital assets and also frominvoluntary conversions (other thancasualty or theft).

Line 8—Other IncomeEnter other items of income not includedon lines 1 through 7. List the type andamount on an attached schedule if theestate or trust has more than one item.

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

Deductions

Depreciation, Depletion, andAmortizationA trust or decedent's estate is allowed adeduction for depreciation, depletion, andamortization only to the extent thedeductions are not apportioned to thebeneficiaries. An estate or trust is notallowed to make an election under section179 to expense certain tangible property.

The estate's or trust's share ofdepreciation, depletion, and amortizationshould be reported on the appropriatelines of Schedule C (or C-EZ), E, or F(Form 1040), the net income or loss fromwhich is shown on line 3, 5, or 6 of Form1041. If the deduction is not related to aspecific business or activity, then report iton line 15a.Depreciation. For a decedent's estate,the depreciation deduction is apportionedbetween the estate and the heirs,legatees, and devisees on the basis of theestate's income allocable to each.

For a trust, the depreciation deductionis apportioned between the incomebeneficiaries and the trust on the basis ofthe trust income allocable to each, unlessthe governing instrument (or local law)requires or permits the trustee to maintaina depreciation reserve. If the trustee isrequired to maintain a reserve, thededuction is first allocated to the trust, upto the amount of the reserve. Any excessis allocated among the beneficiaries in thesame manner as the trust's accountingincome. See Regulations section1.167(h)-1(b).Depletion. For mineral or timber propertyheld by a decedent's estate, the depletiondeduction is apportioned between theestate and the heirs, legatees, anddevisees on the basis of the estate'sincome from such property allocable toeach.

For mineral or timber property held intrust, the depletion deduction isapportioned between the incomebeneficiaries and the trust based on thetrust income from such property allocableto each, unless the governing instrument(or local law) requires or permits thetrustee to maintain a reserve for depletion.If the trustee is required to maintain areserve, the deduction is first allocated tothe trust, up to the amount of the reserve.Any excess is allocated among thebeneficiaries in the same manner as thetrust's accounting income. SeeRegulations section 1.611-1(c)(4).Amortization. The deduction foramortization is apportioned between anestate or trust and its beneficiaries underthe same principles for apportioning thedeductions for depreciation and depletion.

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

Allocation of Deductions forTax-Exempt IncomeGenerally, no deduction that wouldotherwise be allowable is allowed for anyexpense (whether for business or for theproduction of income) that is allocable totax-exempt income. Examples oftax-exempt income include:● Certain death benefits (section 101);● Interest on state or local bonds (section103);● Compensation for injuries or sickness(section 104); and● Income from discharge of indebtednessin a title 11 case (section 108).

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Exception. State income taxes andbusiness expenses that are allocable totax-exempt interest are deductible.

Expenses that are directly allocable totax-exempt income are allocated only totax-exempt income. A reasonableproportion of expenses indirectly allocableto both tax-exempt income and otherincome must be allocated to each classof income.

Deductions That May Be Allowablefor Estate Tax PurposesAdministration expenses and casualtyand theft losses deductible on Form 706may be deducted, to the extent otherwisedeductible for income tax purposes, onForm 1041 if the fiduciary files astatement waiving the right to deduct theexpenses and losses on Form 706. Thestatement must be filed before theexpiration of the statutory period oflimitations for the tax year the deductionis claimed. See Pub. 559 for moreinformation.

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

Limitations on Deductions

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

Passive Activity Loss and CreditLimitationsIn general. Section 469 and theregulations thereunder generally limitlosses from passive activities to theamount of income derived from all passiveactivities. Similarly, credits from passiveactivities are generally limited to the taxattributable to such activities. Theselimitations are first applied at the estateor trust level.

Generally, an activity is a passiveactivity if it involves the conduct of anytrade or business, and the taxpayer doesnot materially participate in the activity.Passive activities do not include workinginterests in oil and gas properties. Seesection 469(c)(3).Note: Material participation standards forestates and trusts had not beenestablished by regulations at the timethese instructions went to print.

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

If the estate or trust distributes aninterest in a passive activity, the basis ofthe property immediately before thedistribution is increased by the passiveactivity losses allocable to the interest,and such losses cannot be deducted.See section 469(j)(12).Note: Losses from passive activities arefirst subject to the at-risk rules. When thelosses are deductible under the at-riskrules, the passive activity rules then apply.Rental activities. Generally, rentalactivities are passive activities, whetheror not the taxpayer materially participates.However, certain taxpayers whomaterially participate in real propertytrades or businesses are not subject tothe passive activity limitations on lossesfrom rental real estate activities in whichthey materially participate. For moredetails, see section 469(c)(7).

For tax years of an estate ending lessthan 2 years after the decedent's date ofdeath, up to $25,000 of deductions anddeduction equivalents of credits fromrental real estate activities in which thedecedent actively participated areallowed. Any excess losses and/or creditsare suspended for the year and carriedforward.Portfolio income. Portfolio income is nottreated as income from a passive activity,and passive losses and credits generallymay not be applied to offset it. Portfolioincome generally includes interest,dividends, royalties, and income fromannuities. Portfolio income of an estateor trust must be accounted for separately.Forms to file. See Form 8582, PassiveActivity Loss Limitations, to figure theamount of losses allowed from passiveactivities. See Form 8582-CR, PassiveActivity Credit Limitations, to figure theamount of credit allowed for the currentyear.

Transactions Between RelatedTaxpayersUnder section 267, a trust that uses theaccrual method of accounting may onlydeduct business expenses and interestowed to a related party in the year thepayment is included in the income of therelated party. For this purpose, a relatedparty includes:

1. A grantor and a fiduciary of anytrust;

2. A fiduciary of a trust and a fiduciaryof another trust, if the same person is agrantor of both trusts;

3. A fiduciary of a trust and abeneficiary of such trust;

4. A fiduciary of a trust and abeneficiary of another trust, if the sameperson is a grantor of both trusts;

5. A fiduciary of a trust and acorporation more than 50% in value of theoutstanding stock of which is owned,directly or indirectly, by or for the trust orby or for a person who is a grantor of thetrust; and

6. An executor of an estate and abeneficiary of that estate, except for asale or exchange to satisfy a pecuniary

bequest (i.e., a bequest of a sum ofmoney).

Line 10—InterestEnter the amount of interest (subject tolimitations) paid or incurred by the estateor trust on amounts borrowed by theestate or trust, or on debt acquired by theestate or trust (e.g., outstandingobligations from the decedent) that is notclaimed elsewhere on the return.

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

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

Personal interest is not deductible.Examples of personal interest includeinterest paid on:● Revolving charge accounts used topurchase personal use property.● Personal notes for money borrowedfrom a bank, credit union, or other person.● Installment loans on personal useproperty.● Underpayments of Federal, state, orlocal income taxes.

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

Types of interest to include on line 10are:

1. Any investment interest (subject tolimitations—see below);

2. Any qualified residence interest(see page 13); and

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

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

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The amount of the investment interestdeduction may be limited. Use Form4952, Investment Interest ExpenseDeduction, to figure the allowableinvestment interest deduction.

If you must complete Form 4952, checkthe box on line 10 and attach Form 4952.Then, add the deductible investmentinterest to the other types of deductibleinterest and enter the total on line 10.Qualified residence interest. Interestpaid or incurred by an estate or trust onindebtedness secured by a qualifiedresidence of a beneficiary of an estate ortrust is treated as qualified residenceinterest if the residence would be aqualified residence (i.e., the principalresidence or the second residenceselected by the beneficiary) if owned bythe beneficiary. The beneficiary musthave a present interest in the estate ortrust or an interest in the residuary of theestate or trust. See Pub. 936, HomeMortgage Interest Deduction, for anexplanation of the general rules fordeducting home mortgage interest.

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

Line 11—TaxesEnter any deductible taxes paid orincurred during the tax year that are notdeductible elsewhere on Form 1041.

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

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

Line 12—Fiduciary FeesEnter the deductible fees paid or incurredto the fiduciary for administering theestate or trust during the tax year.

TIPFiduciary fees deducted on Form706 cannot be deducted onForm 1041.

Line 15a—Other Deductions NOTSubject to the 2% FloorAttach your own schedule, listing by typeand amount, all allowable deductions thatare not deductible elsewhere on Form1041.

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

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

The following are examples ofdeductions that are reported on line 15a.Bond premium(s). For taxable bondsacquired before October 23, 1986, if thefiduciary elected to amortize the premium,report the amortization on this line. Youcannot deduct the amortization fortax-exempt bonds. In all cases where thefiduciary has made an election to amortizethe premium, the basis must be reducedby the amount of amortization.

For more information, see section 171and Pub. 550.

If you claim a bond premium deductionfor the estate or trust, figure the deductionon a separate sheet and attach it toForm 1041.Casualty and theft losses. Use Form4684, Casualties and Thefts, to figure anydeductible casualty and theft losses.Deduction for clean-fuel vehicles.Section 179A allows a deduction for partof the cost of qualified clean-fuel vehicleproperty. See Pub. 535, BusinessExpenses, for more details.Net operating loss deduction (NOLD).An estate or trust is allowed the netoperating loss deduction (NOLD) undersection 172.

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

Line 15b—AllowableMiscellaneous ItemizedDeductions Subject to the 2% FloorMiscellaneous itemized deductions aredeductible only to the extent that theaggregate amount of such deductionsexceeds 2% of adjusted gross income(AGI).

Among the miscellaneous itemizeddeductions that must be included on line15b are expenses for the production orcollection of income under section 212,such as investment advisory fees,subscriptions to investment advisorypublications, and the cost of safe depositboxes.

Miscellaneous itemized deductions donot include deductions for:● Interest under section 163.● Taxes under section 164.● The amortization of bond premiumunder section 171.● Estate taxes attributable to income inrespect of a decedent under section691(c).● Expenses paid or incurred inconnection with the administration of the

estate or trust that would not have beenincurred if the property were NOT held inthe estate or trust.

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

figured by subtracting the following fromtotal income on line 9 of page 1:

1. The administration costs of theestate or trust (the total of lines 12, 14,and 15a to the extent they are costsincurred in the administration of the estateor trust) that would not have beenincurred if the property were NOT held bythe estate or trust;

2. The income distribution deduction(line 18);

3. The amount of the exemption (line20);

4. The deduction for clean-fuelvehicles claimed on line 15a; and

5. The net operating loss deductionclaimed on line 15a.

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

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

The following example illustrates howan algebraic equation can be used tosolve for these unknown amounts:

The Malcolm Smith Trust, a complextrust, earned $20,000 of dividend income,$20,000 of capital gains, and a fullydeductible $5,000 loss from XYZpartnership (chargeable to corpus) in1999. The trust instrument provides thatcapital gains are added to corpus. 50%of the fiduciary fees are allocated toincome and 50% to corpus. The trustclaimed a $2,000 deduction on line 12 ofForm 1041. The trust incurred $1,500 ofmiscellaneous itemized deductions(chargeable to income), which are subjectto the 2% floor. There are no otherdeductions. The trustee made adiscretionary distribution of the accountingincome of $17,500 to the trust's solebeneficiary.

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

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

To compute line 15b, use the equationbelow:

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

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

equation to compute the AGI:

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AGI = (line 9) – (the total of lines 12,14, and 15a to the extent they are costsincurred in the administration of the estateor trust that would not have been incurredif the property were NOT held by theestate or trust) – (line 18) – (line 20).Note: There are no other deductionsclaimed by the trust on line 15a that aredeductible in arriving at AGI.

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

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

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

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

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

Thus, DNI = (line 9) – (line 16, column(2) of Schedule D (Form 1041)) – (line 16)– (AMID)

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

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

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

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

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

Enter the value of AMID on line 15b(the DNI should equal line 7 of ScheduleB) and complete the rest of Form 1041according to the instructions.

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

Line 18—Income DistributionDeductionIf the estate or trust was required todistribute income currently or if it paid,credited, or was required to distribute anyother amounts to beneficiaries during thetax year, complete Schedule B todetermine the estate's or trust's incomedistribution deduction. However, if you arefiling for a pooled income fund, do notcomplete Schedule B. Instead, attach astatement to support the computation of

the income distribution deduction. If theestate or trust claims an incomedistribution deduction, complete andattach:● Part I (through line 9) and Part II ofSchedule I to refigure the deduction on aminimum tax basis; AND● Schedule K-1 (Form 1041) for eachbeneficiary to which a distribution wasmade or required to be made.Cemetery perpetual care fund. On line18, deduct the amount, not more than $5per gravesite, paid for maintenance ofcemetery property. To the right of theentry space for line 18, enter the numberof gravesites. Also write “Section 642(i)trust” in parentheses after the trust'sname at the top of Form 1041. You do nothave to complete Schedules B of Form1041 and K-1 (Form 1041).

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 income inrespect of a decedent (IRD) in its grossincome, and such amount was includedin the decedent's gross estate for estatetax purposes, the estate or trust is allowedto deduct in the same tax year the incomeis included, that portion of the estate taximposed on the decedent's estate that isattributable to the inclusion of the IRD inthe decedent's estate. For an example ofthe computation, see Regulations section1.691(c)-1 and Pub. 559.

If any amount properly paid, credited,or required to be distributed by an estateor trust to a beneficiary consists of IRDreceived by the estate or trust, do notinclude such amounts in determining theestate tax deduction for the estate or trust.Figure the deduction on a separate sheet.Attach the sheet to your return.

Also, a deduction is allowed for theGST tax imposed as a result of a taxabletermination or a direct skip occurring asa result of the death of the transferor. Seesection 691(c)(3). Enter the estate's ortrust's share of these deductions online 19.

Line 20—ExemptionDecedents' estates. A decedent's estateis allowed a $600 exemption.Trusts. A trust whose governinginstrument requires that all income bedistributed currently is allowed a $300exemption, even if it distributed amountsother than income during the tax year. Allother trusts are allowed a $100exemption. See Regulations section1.642(b)-1.

Tax and Payments

Line 22—Taxable IncomeNet operating loss. If line 22 is a loss,the estate or trust may have a netoperating loss (NOL). Do not include the

deductions claimed on lines 13, 18, and20 when figuring the amount of the NOL.An NOL generally may be carried back tothe 2 prior tax years and forward to the20 following tax years. However, if theestate or trust has:● A casualty or theft loss for the tax year,the part of the NOL attributable tocasualty or theft losses may be carriedback to the 3 prior tax years and forwardto the 20 following tax years.● A farming loss for the tax year, the partof the NOL attributable to the farming lossmay be carried back to the 5 prior taxyears and forward to the 20 following taxyears.

Complete Schedule A of Form 1045,Application for Tentative Refund, to figurethe amount of the NOL that is available forcarryback or carryover. Use Form 1045or file an amended return to apply for arefund based on an NOL carryback. Formore details, see Pub. 536, NetOperating Losses.

On the termination of the estate or trust,any unused NOL carryover that would beallowable to the estate or trust in a latertax year, but for the termination, isallowed to the beneficiaries succeeding tothe property of the estate or trust. See theinstructions for Schedule K-1, lines 13dand 13e.Excess deductions on termination. Ifthe estate or trust has for its final yeardeductions (excluding the charitablededuction and exemption) in excess of itsgross income, the excess is allowed asan itemized deduction to the beneficiariessucceeding to the property of the estateor trust.

In general, an unused NOL carryoverthat is allowed to beneficiaries (asexplained above) cannot also be treatedas an excess deduction. However, if thefinal year of the estate or trust is also thelast year of the NOL carryover period, theNOL carryover not absorbed in that taxyear by the estate or trust is included asan excess deduction. See the instructionsfor Schedule K-1, line 13a.

Line 24a—1999 Estimated TaxPayments and Amount AppliedFrom 1998 ReturnEnter the amount of any estimated taxpayment you made with Form 1041-ESfor 1999 plus the amount of anyoverpayment from the 1998 return thatwas applied to the 1999 estimated tax.

If the estate or trust is the beneficiaryof another trust and received a paymentof estimated tax that was credited to thetrust (as reflected on the Schedule K-1issued to the trust), then report thisamount separately with the notation“section 643(g)” in the space next toline 24a.

CAUTION!

Do not include on Form 1041estimated tax paid by an individualbefore death. Instead, include the

payments on the decedent's final incometax return.

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Line 24b—Estimated TaxPayments Allocated toBeneficiariesThe trustee (or executor, for the final yearof the estate) may elect under section643(g) to have any portion of its estimatedtax treated as a payment of estimated taxmade by a beneficiary or beneficiaries.The election is made on Form 1041-T,Allocation of Estimated Tax Payments toBeneficiaries, which must be filed by the65th day after the close of the trust's taxyear. Form 1041-T shows the amounts tobe allocated to each beneficiary. Thisamount is reported on the beneficiary'sSchedule K-1, line 14a.

Failure to file Form 1041-T by the duedate (March 6, 2000, for calendar yearestates and trusts) will result in an invalidelection. An invalid election will requirethe filing of amended Schedules K-1 foreach beneficiary who was allocated apayment of estimated tax.

Attach Form 1041-T to your returnONLY if you have not yet filed it. If youhave already filed Form 1041-T, do notattach a copy to your return.

Line 24d—Tax Paid With Extensionof Time To FileIf you filed either Form 2758 (for estatesonly), Form 8736, or Form 8800 torequest an extension of time to file Form1041, enter the amount that you paid withthe extension request and check theappropriate box(es).

Line 24e—Federal Income TaxWithheldUse line 24e to claim a credit for anyFederal income tax withheld (and notrepaid) by: (a) an employer on wages andsalaries of a decedent received by thedecedent's estate; (b) a payer of certaingambling winnings (e.g., state lotterywinnings); or (c) a payer of distributionsfrom pensions, annuities, retirement orprofit-sharing plans, IRAs, insurancecontracts, etc., received by a decedent'sestate or trust. Attach a copy of FormW-2, Form W-2G, or Form 1099-R. Backup withholding. If the estate ortrust received a 1999 Form 1099 showingFederal income tax withheld (i.e., backupwithholding) on interest income,dividends, or other income, check the boxand include the amount withheld onincome retained by the estate or trust inthe total for line 24e.

Report on Schedule K-1 (Form 1041),line 14, any credit for backup withholdingon income distributed to the beneficiary.

Line 24f—Credit For Tax Paid onUndistributed Capital GainsAttach copy B of Form 2439, Notice toShareholder of Undistributed Long-TermCapital Gains.

Line 24g—Credit for Federal Taxon FuelsEnter any credit for Federal excise taxespaid on fuels that are ultimately used fornontaxable purposes (e.g., an off-highway

business use). Attach Form 4136, Creditfor Federal Tax Paid on Fuels. See Pub.378, Fuel Tax Credits and Refunds, formore information.

Line 26—Estimated Tax PenaltyIf line 27 is at least $1,000 and more than10% of the tax shown on Form 1041, orthe estate or trust underpaid its 1999estimated tax liability for any paymentperiod, it may owe a penalty. See Form2210 to determine whether the estate ortrust owes a penalty and to figure theamount of the penalty.Note: The penalty may be waived undercertain conditions. See Pub. 505, TaxWithholding and Estimated Tax, fordetails.

Line 27—Tax DueYou must pay the tax in full when thereturn is filed. Make the check or moneyorder payable to the “United StatesTreasury.” Write the EIN and “1999 Form1041” on the payment. Enclose, but donot attach, the payment with Form 1041.

Line 29a—Credited to 2000Estimated TaxEnter the amount from line 28 that youwant applied to the estate's or trust's 2000estimated tax.

Schedule A—CharitableDeduction

General InstructionsGenerally, any part of the gross incomeof an estate or trust (other than a simpletrust) that, under the terms of the will orgoverning instrument, is paid (or treatedas paid) during the tax year for acharitable purpose specified in section170(c) is allowed as a deduction to theestate or trust. It is not necessary that thecharitable organization be created ororganized in the United States.

Trusts that claim a charitable deductionmust also file Form 1041-A. See Form1041-A for exceptions.

A pooled income fund, nonexemptprivate foundation, or trust with unrelatedbusiness income should attach a separatesheet to Form 1041 instead of usingSchedule A of Form 1041 to figure thecharitable deduction.Election to treat contributions as paidin the prior tax year. The fiduciary of anestate or trust may elect to treat as paidduring the tax year any amount of grossincome received during that tax year orany prior tax year that was paid in thenext tax year for a charitable purpose.

For example, if a calendar year estateor trust makes a qualified charitablecontribution on February 10, 2000, fromincome earned in 1999 or prior, then thefiduciary can elect to treat the contributionas paid in 1999.

To make the election, the fiduciary mustfile a statement with Form 1041 for the taxyear in which the contribution is treatedas paid. This statement must include:

1. The name and address of thefiduciary;

2. The name of the estate or trust;3. An indication that the fiduciary is

making an election under section642(c)(1) for contributions treated as paidduring such tax year;

4. The name and address of eachorganization to which any suchcontribution is paid; and

5. The amount of each contributionand date of actual payment or, ifapplicable, the total amount ofcontributions paid to each organizationduring the next tax year, to be treated aspaid in the prior tax year.

The election must be filed by the duedate (including extensions) for Form 1041for the next tax year.

For more information about thecharitable deduction, see section 642(c)and related regulations.

Specific Instructions

Line 1—Amounts Paid or PermanentlySet Aside for Charitable PurposesFrom Gross IncomeEnter amounts that were paid for acharitable purpose out of the estate's ortrust's gross income, including any capitalgains that are attributable to income underthe governing instrument or local law.Include amounts paid during the tax yearfrom gross income received in a prior taxyear, but only if no deduction was allowedfor any prior tax year for these amounts.

Estates, and certain trusts, may claima deduction for amounts permanently setaside for a charitable purpose from grossincome. Such amounts must bepermanently set aside during the tax yearto be used exclusively for religious,charitable, scientific, literary, oreducational purposes, or for theprevention of cruelty to children oranimals, or for the establishment,acquisition, maintenance, or operation ofa public cemetery not operated for profit.

For a trust to qualify, the trust may notbe a simple trust, and the set asideamounts must be required by the termsof a trust instrument that was created onor before October 9, 1969.

Further, the trust instrument mustprovide for an irrevocable remainderinterest to be transferred to or for the useof an organization described in section170(c); OR the trust must have beencreated by a grantor who was at all timesafter October 9, 1969, under a mentaldisability to change the terms of the trust.

Also, certain testamentary trusts thatwere established by a will that wasexecuted on or before October 9, 1969,may qualify. See Regulations section1.642(c)-2(b).

Do not include any capital gains for thetax year allocated to corpus and paid orpermanently set aside for charitablepurposes. Instead, enter these amountson line 4.

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Line 2—Tax-Exempt Income Allocableto Charitable ContributionsAny estate or trust that pays or sets asideany part of its income for a charitablepurpose must reduce the deduction by theportion allocable to any tax-exemptincome. If the governing instrumentspecifically provides as to the source fromwhich amounts are paid, permanently setaside, or to be used for charitablepurposes, the specific provisions control.In all other cases, determine the amountof tax-exempt income allocable tocharitable contributions by multiplying line1 by a fraction, the numerator of which isthe total tax-exempt income of the estateor trust, and the denominator of which isthe gross income of the estate or trust.Do not include in the denominator anylosses allocated to corpus.

Line 4—Capital Gains for the Tax YearAllocated to Corpus and Paid orPermanently Set Aside for CharitablePurposesEnter the total of all capital gains for thetax year that are:● Allocated to corpus; and● Paid or permanently set aside forcharitable purposes.

Line 6—Section 1202 ExclusionAllocable to Capital Gains Paid orPermanently Set Aside for CharitablePurposesIf the exclusion of gain from the sale orexchange of qualified small businessstock was claimed, enter the part of thegain included on Schedule A, lines 1 and4, that was excluded under section 1202.

Schedule B—IncomeDistribution Deduction

General InstructionsIf the estate or trust was required todistribute income currently or if it paid,credited, or was required to distribute anyother amounts to beneficiaries during thetax year, complete Schedule B todetermine the estate's or trust's incomedistribution deduction. However, if you arefiling for a pooled income fund, do notcomplete Schedule B. Instead, attach astatement to support the computation ofthe income distribution deduction.Note: Use Schedule I to compute theDNI and income distribution deduction ona minimum tax basis.Separate share rule. If a single trust hasmore than one beneficiary, and if differentbeneficiaries have substantially separateand independent shares, their shares aretreated as separate trusts for the solepurpose of determining the DNI allocableto the respective beneficiaries. For theestates of decedents dying after August5, 1997, a similar rule applies to treatsubstantially separate and independentshares of different beneficiaries of anestate as separate estates.

If the separate share rule applies, figurethe DNI allocable to each beneficiary ona separate sheet and attach the sheet tothis return. Any deduction or loss that isapplicable solely to one separate shareof the trust or estate is not available toany other share of the same trust orestate.

For more information, see section663(c) and related regulations.

Specific Instructions

Line 1—Adjusted Total IncomeGenerally, enter on line 1, Schedule B,the amount from line 17 on page 1 ofForm 1041. However if both lines 4 and17 on page 1 of Form 1041 are losses,enter as a negative amount on line 1,Schedule B, the smaller of those losses.If line 4 is zero or a gain and line 17 is aloss, enter zero on line 1, Schedule B.

If you are filing for a simple trust,subtract from adjusted total income anyextraordinary dividends or taxable stockdividends included on page 1, line 2, anddetermined under the governinginstrument and applicable local law to beallocable to corpus.

Line 2—Adjusted Tax-Exempt InterestTo figure the adjusted tax-exemptinterest:

Step 1. Add tax-exempt interest incomeon line 2 of Schedule A, any expensesallowable under section 212 allocable totax-exempt interest, and any interestexpense allocable to tax-exempt interest.

Step 2. Subtract the Step 1 total fromthe amount of tax-exempt interest(including exempt-interest dividends)received.

Section 212 expenses that are directlyallocable to tax-exempt interest areallocated only to tax-exempt interest. Areasonable proportion of section 212expenses that are indirectly allocable toboth tax-exempt interest and otherincome must be allocated to each classof income.

Figure the interest expense allocable totax-exempt interest according to theguidelines in Rev. Proc. 72-18, 1972-1C.B. 740.

See Regulations sections 1.643(a)-5and 1.265-1 for more information.

Line 3Include all capital gains, whether or notdistributed, that are attributable to incomeunder the governing instrument or locallaw. For example, if the trustee distributed50% of the current year's capital gains tothe income beneficiaries (and reflects thisamount in column (1), line 16 of ScheduleD (Form 1041)), but under the governinginstrument all capital gains areattributable to income, then include 100%of the capital gains on line 3. If theamount on Schedule D (Form 1041), line16, column (1) is a net loss, enter zero.

If the exclusion of gain from the saleor exchange of qualified small businessstock was claimed, do not reduce the

gain on line 3 by any amount excludedunder section 1202.

Line 5In figuring the amount of long-term andshort-term capital gain for the tax yearincluded on Schedule A, line 1, thespecific provisions of the governinginstrument control if the instrumentspecifically provides as to the source fromwhich amounts are paid, permanently setaside, or to be used for charitablepurposes.

In all other cases, determine theamount to enter by multiplying line 1 ofSchedule A by a fraction, the numeratorof which is the amount of net capital gainsthat are included in the accounting incomeof the estate or trust (i.e., not allocated tocorpus) AND are distributed to charities,and the denominator of which is all itemsof income (including the amount of suchnet capital gains) included in the DNI.

Reduce the amount on line 5 by anyallocable section 1202 exclusion.

Line 8—Accounting IncomeIf you are filing for a decedent's estate ora simple trust, skip this line. If you arefiling for a complex trust, enter the incomefor the tax year determined under theterms of the governing instrument andapplicable local law. Do not includeextraordinary dividends or taxable stockdividends determined under the governinginstrument and applicable local law to beallocable to corpus.

Lines 9 and 10Do not include any:● Amounts deducted on prior year'sreturn that were required to be distributedin the prior year.● Amount that is properly paid or creditedas a gift or bequest of a specific amountof money or specific property. (To qualifyas a gift or bequest, the amount must bepaid in three or fewer installments.) Anamount that can be paid or credited onlyfrom income is not considered a gift orbequest.● Amount paid or permanently set asidefor charitable purposes or otherwisequalifying for the charitable deduction.

Line 9—Income Required To BeDistributed CurrentlyLine 9 is to be completed by all simpletrusts as well as complex trusts anddecedent's estates, that are required todistribute income currently, whether it isdistributed or not. The determination ofwhether trust income is required to bedistributed currently depends on the termsof the governing instrument and theapplicable local law.

The line 9 distributions are referred toas first tier distributions and are deductibleby the estate or trust to the extent of theDNI. The beneficiary includes suchamounts in his or her income to the extentof his or her proportionate share of theDNI.

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Line 10—Other Amounts Paid,Credited, or Otherwise Required To BeDistributedLine 10 is to be completed ONLY by adecedent's estate or complex trust. Thesedistributions consist of any other amountspaid, credited, or required to bedistributed and are referred to as secondtier distributions. Such amounts includeannuities to the extent not paid out ofincome, mandatory and discretionarydistributions of corpus, and distributionsof property in kind.

If Form 1041-T was filed to elect to treatestimated tax payments as made by abeneficiary, the payments are treated aspaid or credited to the beneficiary on thelast day of the tax year and must beincluded on line 10.

Unless a section 643(e)(3) election ismade, the value of all noncash propertyactually paid, credited, or required to bedistributed to any beneficiaries is thesmaller of:

1. The estate's or trust's adjustedbasis in the property immediately beforedistribution, plus any gain or minus anyloss recognized by the estate or trust onthe distribution (basis of beneficiary), or

2. The fair market value (FMV) of suchproperty.

If a section 643(e)(3) election is madeby the fiduciary, then the amount enteredon line 10 will be the FMV of the property.

A fiduciary of a complex trust or adecedent's estate may elect to treat anyamount paid or credited to a beneficiarywithin 65 days following the close of thetax year as being paid or credited on thelast day of that tax year. To make thiselection, see the instructions for Question6 on page 19.

The beneficiary includes the amountson line 10 in his or her income only to theextent of his or her proportionate shareof the DNI.Complex trusts. If the second tierdistributions exceed the DNI allocable tothe second tier, the trust may have anaccumulation distribution. See the line 11instructions below.

Line 11—Total DistributionsIf line 11 is more than line 8, and you arefiling for a complex trust that haspreviously accumulated income, see theinstructions on page 29 to see if you mustcomplete Schedule J (Form 1041) .

Line 12—Adjustment for Tax-ExemptIncomeIn figuring the income distributiondeduction, the estate or trust is notallowed a deduction for any item of theDNI that is not included in the grossincome of the estate or trust. Thus, forpurposes of figuring the allowable incomedistribution deduction, the DNI (line 7) isfigured without regard to any tax-exemptinterest.

If tax-exempt interest is the onlytax-exempt income included in the totaldistributions (line 11), and the DNI (line

7) is less than or equal to line 11, thenenter on line 12 the amount from line 2.

If tax-exempt interest is the onlytax-exempt income included in the totaldistributions (line 11), and the DNI is morethan line 11 (i.e., the estate or trust madea distribution that is less than the DNI),then figure the adjustment by multiplyingline 2 by a fraction, the numerator ofwhich 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 incomeother than tax-exempt interest, figure line12 by subtracting the total of the followingfrom tax-exempt income included online 11:

1. The charitable contributiondeduction allocable to such tax-exemptincome, and

2. Expenses allocable to tax-exemptincome.

Expenses that are directly allocable totax-exempt income are allocated only totax-exempt income. A reasonableproportion of expenses indirectly allocableto both tax-exempt income and otherincome must be allocated to each classof income.

Schedule G—TaxComputation

Line 1aTax rate schedule. For tax yearsbeginning in 1999, figure the tax using theTax Rate Schedule below. Enter the taxon line 1a and check the “Tax rateschedule” box.

Schedule D. If the estate or trust hadboth net capital gain and any taxableincome, complete Part V of Schedule D(Form 1041), enter the tax from line 53of Schedule D, and check the “ScheduleD” box.

Line 2a—Foreign Tax CreditAttach Form 1116, Foreign Tax Credit(Individual, Estate, Trust, or NonresidentAlien Individual), if you elect to claimcredit for income or profits taxes paid oraccrued to a foreign country or a U.S.possession. The estate or trust may claimcredit for that part of the foreign taxes notallocable to the beneficiaries (includingcharitable beneficiaries). Enter theestate's or trust's share of the credit online 2a. See Pub. 514, Foreign Tax Creditfor Individuals, for details.

Line 2b

Nonconventional Source Fuel CreditIf the estate or trust can claim any section29 credit for producing fuel from anonconventional source, figure the crediton a separate sheet and attach it to thereturn. Include the credit on line 2b.

Qualified Electric Vehicle CreditUse Form 8834, Qualified Electric VehicleCredit, if the estate or trust can claim acredit for the purchase of a new qualifiedelectric vehicle. Include the credit online 2b.

Line 2c—General Business CreditComplete this line if the estate or trust isclaiming any of the credits listed below.Use the appropriate credit form to figurethe credit. If the estate or trust is claimingonly one credit, enter the form numberand the amount of the credit in the spaceprovided.

If the estate or trust is claiming morethan one credit (not including theempowerment zone employment credit),a credit from a passive activity (other thanthe low-income housing credit or theempowerment zone employment credit),or a credit carryforward, also completeForm 3800, General Business Credit, tofigure the total credit and enter theamount from Form 3800 on line 2c. Also,be sure to check the box for Form 3800.

Do not include any amounts that areallocated to a beneficiary. Credits that areallocated between the estate or trust andthe beneficiaries are listed in theinstructions for Schedule K-1, line 14, onpage 32. Generally, these credits areapportioned on the basis of the incomeallocable to the estate or trust and thebeneficiaries. Report the estate's or trust'sshare of the following general businesscredits on Schedule G, line 2c.● Investment credit (Form 3468).● Work opportunity credit (Form 5884).● Welfare-to-work credit (Form 8861).● Credit for alcohol used as fuel (Form6478).● Credit for increasing research activities(Form 6765).● Low-income housing credit (Form8586).● Enhanced oil recovery credit (Form8830).● Disabled access credit (Form 8826).● Renewable electricity production credit(Form 8835).● Empowerment zone employment credit(Form 8844).● Indian employment credit (Form 8845).● Credit for employer social security andMedicare taxes paid on certain employeetips (Form 8846).● Orphan drug credit (Form 8820).● Credit for contributions to selectedcommunity development corporations(Form 8847).● General credits from an electing largepartnership. Report these credits on Form3800, line 1o.

1999 Tax Rate Schedule

Iftaxableincomeis:

Over—Butnot

over—Its tax is:

Of theamountover—

$0 $1,750 15% $01,750 4,050 $262.50 + 28% 1,7504,050 6,200 906.50 + 31% 4,0506,200 8,450 1,573.00 + 36% 6,2008,450 ----- 2,383.00 + 39.6% 8,450

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Line 2d—Credit for Prior YearMinimum TaxAn estate or trust that paid alternativeminimum tax in a previous year may beeligible for a minimum tax credit in 1999.See Form 8801, Credit for Prior YearMinimum Tax—Individuals, Estates, andTrusts.

Line 5—Recapture TaxesRecapture of investment credit. If theestate or trust disposed of investmentcredit property or changed its use beforethe end of the recapture period, see Form4255, Recapture of Investment Credit, tofigure the recapture tax allocable to theestate or trust.Recapture of low-income housingcredit. If the estate or trust disposed ofproperty (or there was a reduction in thequalified basis of the property) on whichthe low-income housing credit wasclaimed, see Form 8611, Recapture ofLow-Income Housing Credit, to figure anyrecapture tax allocable to the estate ortrust.Recapture of qualified electric vehiclecredit. If the estate or trust claimed thequalified electric vehicle credit in a priortax year for a vehicle that ceased toqualify for the credit, part or all of thecredit may have to be recaptured. SeePub. 535 for details. If the estate or trustowes any recapture tax, include it on line5 and write “QEV” on the dotted line to theleft of the entry space.Recapture of the Indian employmentcredit. Generally, if the estate or trustterminates a qualified employee less than1 year after the date of initial employment,any Indian employment credit allowed fora prior tax year by reason of wages paidor incurred to that employee must berecaptured. See Form 8845 for details. Ifthe estate or trust owes any recapture tax,include it on line 5 and write “45A” on thedotted line to the left of the entry space.

Line 7—Household EmploymentTaxesIf any of the following apply, getSchedule H (Form 1040), HouseholdEmployment Taxes, and its instructions,to see if the estate or trust owes thesetaxes.

1. The estate or trust paid any onehousehold employee cash wages of$1,100 or more in 1999. Cash wagesinclude wages paid by checks, moneyorders, etc. When figuring the amount ofcash wages paid, combine cash wagespaid by the estate or trust with cashwages paid to the household employee inthe same calendar year by the householdof the decedent or beneficiary for whomthe administrator, executor, or trustee ofthe estate or trust is acting.

2. The estate or trust withheld Federalincome tax during 1999 at the request ofany household employee.

3. The estate or trust paid total cashwages of $1,000 or more in any calendarquarter of 1998 or 1999 to householdemployees.

Line 8—Total TaxInterest on tax deferred under theinstallment method for certainnondealer real property installmentobligations. If an obligation arising fromthe disposition of real property to whichsection 453A applies is outstanding at theclose of the year, the estate or trust mustinclude the interest due under section453A(c) in the amount to be entered online 8 of Schedule G, Form 1041, with thenotation “Section 453A(c) interest.” Attacha schedule showing the computation.Form 4970, Tax on AccumulationDistribution of Trusts. Include on thisline any tax due on an accumulationdistribution from a trust. To the left of theentry space, write “From Form 4970” andthe amount of the tax.Form 8697, Interest ComputationUnder the Look-Back Method forCompleted Long-Term Contracts.Include the interest due under thelook-back method of section 460(b)(2). Tothe left of the entry space, write “FromForm 8697” and the amount of interestdue.Form 8866, Interest ComputationUnder the Look-Back Method forProperty Depreciated Under theIncome Forecast Method. Include theinterest due under the look-back methodof section 167(g)(2). To the left of theentry space, write “From Form 8866” andthe amount of interest due.Form 5329, Additional TaxesAttributable to IRAs, Other QualifiedRetirement Plans, Annuities, ModifiedEndowment Contracts, and MSAs. Ifthe estate or trust fails to receive theminimum distribution under section 4974,use Form 5329 to pay the excise tax. Tothe left of the entry space, write “FromForm 5329” and the amount of the tax.Tax on electing small business trusts(ESBTs). Special rules apply whenfiguring the tax on the portion of an ESBTconsisting of stock in one or more Scorporations. This tax must be figuredseparately from the tax on the remainderof the ESBT and is included in the totaltax on Schedule G, line 8. The tax on theremainder of the ESBT is figured in thenormal manner on Form 1041.

The tax on the S corporation items isfigured as if that portion of the ESBT werea separate trust with the followingmodifications:● Take into account only the income,losses, deductions, and credits allocatedto the ESBT as an S corporationshareholder and gain or loss from thedisposition of S corporation stock.● You may not claim a deduction forcapital losses in excess of capital gains.● You may not claim an incomedistribution deduction or an exemptionamount.● Except in figuring the maximum tax oncapital gains, the tax is 39.6% of theseparate trust's taxable income.● You may not claim an exemptionamount in figuring the alternativeminimum tax.

When figuring the tax and DNI on theremaining portion of the trust, disregardthe S corporation items.

Do not apportion to the beneficiariesany of the S corporation items.

Attach the tax computation to thereturn. To the left of the entry space, write“Sec. 641(c)” and the amount of tax onthe S corporation items.

If the ESBT consists entirely of stock inone or more S corporations, you do notneed to make any entries on lines 1–22of page 1. Complete the entity portion;follow the instructions above for figuringthe tax on the S corporation items; carrythe tax from line 8 of Schedule G to line23 on page 1; and complete the rest ofthe return.

Other Information

Question 1If the estate or trust received tax-exemptincome, figure the allocation of expensesbetween tax-exempt and taxable incomeon a separate sheet and attach it to thereturn. Enter only the deductible amountson the return. Do not figure the allocationon the return itself. For more information,see the instructions for Allocation ofDeductions for Tax-Exempt Income onpage 11.

Report the amount of tax-exemptinterest income received or accrued in thespace provided below Question 1.

Also, include any exempt-interestdividends the estate or trust received asa shareholder in a mutual fund or otherregulated investment company.

Question 2All salaries, wages, and othercompensation for personal services mustbe included on the return of the personwho earned the income, even if theincome was irrevocably assigned to atrust by a contract assignment or similararrangement.

The grantor or person creating the trustis considered the owner if he or she keeps“beneficial enjoyment” of or substantialcontrol over the trust property. The trust'sincome, deductions, and credits areallocable to the owner.

If you checked “Yes” for Question 2,see the Grantor Type Trust instructionson page 8.

Question 3Check the “Yes” box and enter the nameof the foreign country if either 1 or 2 belowapplies.

1. At any time during the year theestate or trust had an interest in orsignature or other authority over a bank,securities, or other financial account in aforeign country.

Exception. Check “No” if either of thefollowing applies to the estate or trust:● The combined value of the accountswas $10,000 or less during the wholeyear; OR

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● The accounts were with a U.S. militarybanking facility operated by a U.S.financial institution.

2. The estate or trust owns more than50% of the stock in any corporation thatowns one or more foreign bank accounts.

Get Form TD F 90-22.1, Report ofForeign Bank and Financial Accounts, tosee if the estate or trust is considered tohave an interest in or signature or otherauthority over a bank, securities, or otherfinancial account in a foreign country.

If you checked “Yes” for Question 3, fileForm TD F 90-22.1 by June 30, 2000,with the Department of the Treasury at theaddress shown on the form.

Form TD F 90-22.1 is not a tax return,so do not file it with Form 1041.

You may order Form TD F 90-22.1 bycalling 1-800-829-3676(1-800-TAX-FORM).

Question 4The estate or trust may be required to fileForm 3520, Annual Return To ReportTransactions With Foreign Trusts andReceipt of Certain Foreign Gifts, if:● It directly or indirectly transferredproperty or money to a foreign trust. Forthis purpose, any U.S. person whocreated a foreign trust is considered atransferor.● It is treated as the owner of any part ofthe assets of a foreign trust under thegrantor trust rules.● It received a distribution from a foreigntrust.Note: An owner of a foreign trust mustensure that the trust files an annualinformation return on Form 3520-A,Annual Information Return of ForeignTrust With a U.S. Owner.

Question 5An estate or trust claiming an interestdeduction for qualified residence interest(as defined in section 163(h)(3)) onseller-provided financing, must include onan attachment to the 1999 Form 1041 thename, address, and taxpayer identifyingnumber of the person to whom theinterest was paid or accrued (i.e., theseller).

If the estate or trust received or accruedsuch interest, it must provide identicalinformation on the person liable for suchinterest (i.e., the buyer). This informationdoes not need to be reported if itduplicates information already reportedon Form 1098.

Question 6To make the section 663(b) election totreat any amount paid or credited to abeneficiary within 65 days following theclose of the tax year as being paid orcredited on the last day of that tax year,check the box. This election can be madeby the fiduciary of a complex trust or theexecutor of a decedent's estate. For theelection to be valid, you must file Form1041 by the due date (includingextensions). Once made, the election isirrevocable.

Question 7To make the section 643(e)(3) election torecognize gain on property distributed inkind, check the box and see theinstructions for Schedule D (Form 1041).

Question 9Generally, a beneficiary is a skip personif the beneficiary is in a generation that istwo or more generations below thegeneration of the transferor to the trust.

To determine if a beneficiary that is atrust is a skip person, and for exceptionsto the general rules, see the definition ofa skip person in the instructions forSchedule R of Form 706.

Schedule I—AlternativeMinimum Tax

General InstructionsUse Schedule I to compute:

1. The estate's or trust's alternativeminimum taxable income;

2. The income distribution deductionon a minimum tax basis; and

3. The estate's or trust's alternativeminimum tax (AMT).

Who Must Complete● Complete Schedule I, Parts I and II, ifthe estate or trust is required to completeSchedule B.● Complete Schedule I if the estate's ortrust's share of alternative minimumtaxable income (Part I, line 12) exceeds$22,500.● Complete Schedule I if the estate ortrust claims a credit on line 2b, 2c, or 2dof Schedule G.

RecordkeepingSchedule I contains adjustments and taxpreference items that are treateddifferently for regular tax and AMTpurposes. If you, as fiduciary for theestate or trust, completed a form to figurean item for regular tax purposes, you mayhave to complete it a second time for AMTpurposes. Generally, the differencebetween the amounts on the two forms isthe AMT adjustment or tax preferenceitem to enter on Schedule I. Except forForm 1116, any additional formcompleted for AMT purposes does nothave to be filed with Form 1041.

For regular tax purposes, somedeductions and credits may result incarrybacks or carryforwards to other taxyears. Examples are: investment interestexpense; a net operating loss deduction;a capital loss; and the foreign tax credit.Because these items may be refigured forthe AMT, the carryback or carryforwardamount may be different for regular andAMT purposes. Therefore, you shouldkeep records of these differentcarryforward and carryback amounts forthe AMT and regular tax. The AMTcarryforward will be important incompleting Schedule I for 2000.

Credit for Prior Year Minimum TaxEstates and trusts that paid alternativeminimum tax in 1998, or had a minimumtax credit carryforward, may be eligible fora minimum tax credit in 1999. SeeForm 8801.

Partners, Shareholders, etc.An estate or trust that is a partner in apartnership or a shareholder in an Scorporation must take into account itsshare of items of income and deductionsthat enter into the computation of itsadjustments and tax preference items.

Allocation of Deductions toBeneficiariesThe distributable net alternative minimumtaxable income (DNAMTI) of the estateor trust does not include amounts ofdepreciation, depletion, and amortizationthat are allocated to the beneficiaries, justas the distributable net income (DNI) ofthe estate or trust does not include theseitems for regular tax purposes.

Report separately on line 12 ofSchedule K-1 (Form 1041) anyadjustments or tax preference itemsattributable to depreciation, depletion, andamortization that were allocated to thebeneficiaries.

Optional Write-Off for CertainExpendituresThere is no AMT adjustment for thefollowing items if the estate or trust electsto deduct them ratably over the period oftime shown for the regular tax:● Circulation expenditures—3 years(section 173).● Research and experimentalexpenditures—10 years (section 174).● Intangible drilling costs—60 months(section 263(c)).● Mining exploration and developmentcosts—10 years (sections 616(a) and617(a)).

The election must be made in the yearthe expenditure was made and may berevoked only with IRS consent. Seesection 59(e) for more details.

Specific Instructions

Part I—Estate's or Trust's Share ofAlternative Minimum Taxable Income

Line 1—Adjusted Total Income or(Loss)Enter the amount from line 17 of page 1.If the adjusted total income includes theamount of the alcohol fuel credit asrequired under section 87, reduce theadjusted total income by the creditincluded in income.

Line 2—Net Operating Loss DeductionEnter any net operating loss deduction(NOLD) from line 15a of page 1 as apositive amount.

Line 4a—InterestIn determining the alternative minimumtaxable income, qualified residenceinterest (other than qualified housing

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interest defined in section 56(e)) is notallowed.

If you completed Form 4952 for regulartax purposes, you may have anadjustment on this line. Refigure yourinvestment interest expense on anotherForm 4952 as follows:

Step 1. On line 1 of Form 4952, addany interest expense allocable tospecified private activity bonds issuedafter August 7, 1986, to the other interestexpense. For a definition of “specifiedprivate activity bonds,” see theinstructions for line 4p.

Step 2. On line 2, enter the AMTdisallowed investment interest expensefrom 1998.

Step 3. When completing Part II ofForm 4952, refigure gross income fromproperty held for investment, any net gainfrom the disposition of property held forinvestment, and any investmentexpenses, taking into account all AMTadjustments and tax preference items thatapply. Include any interest income andinvestment expenses from private activitybonds issued after August 7, 1986.

To figure the adjustment for line 4a,subtract the total interest allowable forAMT purposes from the interest deductionclaimed on line 10 of page 1. If the totalinterest expense allowed for AMTpurposes is more than that allowed forregular tax purposes, enter the differenceas a negative amount on line 4a.

Line 4b—TaxesEnter any state, local, or foreign realproperty taxes; state or local personalproperty taxes; and state, local, or foreignincome taxes that were included on line11 of page 1.

Line 4d—Refund of TaxesEnter any refunds received in 1999 oftaxes described for line 4b above thatwere deducted in a tax year after 1986.

Line 4e—Depreciation of PropertyPlaced in Service After 1986This section describes when depreciationmust be refigured for the AMT and howto figure the amount to enter on line 4e.

Do not include on this line anydepreciation adjustment from:● An activity for which the estate or trustis not at risk;● A partnership or an S corporation if thebasis limitations under section 704(d) or1366(d) apply;● A tax shelter farm activity; or● A passive activity.Instead, take these depreciationadjustments into account when figuringthe adjustments on line 4l, 4m, or 4n,whichever applies.What depreciation must be refiguredfor the AMT? Generally, you mustrefigure depreciation for the AMT,including depreciation allocable toinventory costs, for:

● Property placed in service after 1998that is depreciated for the regular taxusing the 200% declining balance method(generally 3-, 5-, 7-, or 10-year propertyunder the modified cost recovery system(MACRS)), and● Tangible property placed in serviceafter 1986 and before 1999. If thetransitional election was made undersection 203(a)(1)(B) of the Tax ReformAct of 1986, this rule applies to propertyplaced in service after July 31, 1986.What depreciation is NOT refigured forthe AMT? Do not refigure depreciationfor the AMT for:● Property placed in service after 1998that is depreciated for the regular taxusing the 150% declining balance methodor the straight line method, includingsection 1250 property (generally,residential rental and nonresidential realproperty).● Motion picture films, videotapes, orsound recordings.● Property depreciated under theunit-of-production method or any othermethod not expressed in a term of years.● Property for which you elected to usethe alternative depreciation system (ADS)for the regular tax.● Qualified Indian reservation property.How is depreciation refigured for theAMT?

Property placed in service before1999. Refigure depreciation for the AMTusing ADS with the same convention usedfor the regular tax. See the table below forthe method and recovery period to use.

THEN use the . . .

Section 1250property.

Straight line methodover 40 years.

Tangible property(other than section1250 property)depreciated usingstraight line for theregular tax.

Straight line methodover the property’sAMT class life.

Any other tangibleproperty.

150% decliningbalance method,switching to straightline the first tax yearit gives a largerdeduction, over theproperty’s AMTclass life.

IF the property is . . .

Property Placed in Service Before 1999

Property placed in service after1998. For property depreciated for theregular tax using the 200% decliningbalance method, use the 150% decliningbalance method, switching to straight linethe first tax year it gives a largerdeduction, and the same convention andrecovery period used for the regular tax.

How is the AMT class life determined?The class life used for the AMT is notnecessarily the same as the recoveryperiod used for the regular tax. The classlives for the AMT are listed in Rev. Proc.87-56, 1987-2 C.B. 674, and in Pub. 946,How To Depreciate Property. Use 12years for any tangible personal propertynot assigned a class life.

TIPSee Pub. 946 for optional tablesthat can be used to figure AMTdepreciation. Rev. Proc. 89-15,

1989-1 C.B. 816, has special rules forshort tax years and for property disposedof before the end of the recovery period.How is the line 4e adjustment figured?Subtract the AMT deduction fordepreciation from the regular taxdeduction and enter the result. If the AMTdeduction is more than the regular taxdeduction, enter the difference as anegative amount.

In addition to the AMT adjustment toyour deduction for depreciation, you mustalso adjust the amount of depreciationthat was capitalized to inventory, if any,to account for the difference between therules for the regular tax and the AMT.Include on this line the current yearadjustment to taxable income, if any,resulting from the difference.

Line 4f—Circulation and Research andExperimental Expenditures

CAUTION!

Do not make this adjustment forexpenditures for which you electedthe optional 3-year write-off period

(10-year for research and experimentalexpenditures) under section 59(e) forregular tax purposes.Circulation expenditures. Circulationexpenditures deducted under section173(a) for regular tax purposes must beamortized for AMT purposes over 3 yearsbeginning with the year the expenditureswere paid or incurred.Research and experimentalexpenditures. Research andexperimental expenditures deductedunder section 174(a) for regular taxpurposes generally must be amortized forAMT purposes over 10 years beginningwith the year the expenditures were paidor incurred. However, do not make anadjustment for expenditures paid orincurred in connection with an activity inwhich the estate or trust materiallyparticipated under the passive activityrules.

Enter the difference between theamount allowed for AMT purposes andthe amount allowed for regular taxpurposes. If the amount for AMTpurposes exceeds the amount allowed forregular tax purposes, enter the differenceas a negative amount.

See section 56(b)(2)(B) for a discussionof the rules for losses on properties forwhich a deduction was allowed undersection 173(a) or 174(a).

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Line 4g—Mining Exploration andDevelopment Costs

CAUTION!

Do not make this adjustment forcosts for which you elected theoptional 10-year write-off period

under section 59(e) for regular taxpurposes.

Expenditures for the development orexploration of a mine or certain othermineral deposits (other than an oil, gas,or geothermal well) deducted undersections 616(a) and 617(a) for regular taxpurposes must be amortized for AMTpurposes over 10 years beginning withthe year the expenditures were paid orincurred.

Enter the difference between theamount allowed for AMT purposes andthe amount allowed for regular taxpurposes. If the amount allowed for AMTpurposes exceeds the amount deductedfor regular tax purposes, enter thedifference as a negative amount.

See section 56(a)(2)(B) for a discussionof the rules for losses sustained onproperties for which a deduction wasallowed under section 616(a) or 617(a).

Line 4h—Long-Term Contracts EnteredInto After February 28, 1986For AMT purposes, the percentage ofcompletion method of accountingdescribed in section 460(b) generallymust be used. However, this rule does notapply to any home construction contract(as defined in section 460(e)(6)).Note: Contracts described in section460(e)(1) are subject to the simplifiedmethod of cost allocation of section460(b)(4).

Enter the difference between the AMTand regular tax income. If the AMTincome is smaller, enter the difference asa negative amount.

Line 4i—Amortization of PollutionControl FacilitiesThe amortization deduction under section169 must be refigured for the AMT. Forfacilities placed in service after 1986 andbefore 1999, figure the amortizationdeduction for the AMT using the ADSdescribed in section 168(g). For facilitiesplaced in service after 1998, figure theAMT deduction under MACRS using thestraight line method. Enter the differencebetween the regular tax and AMTdeduction. If the AMT amount is greater,enter the difference as a negative amount.

Line 4j—Installment Sales of CertainPropertyThe installment method does not apply forAMT purposes to any nondealerdisposition of property that occurred afterAugust 16, 1986, but before the first dayof your tax year that began in 1987, if aninstallment obligation to which theproportionate disallowance rule appliedarose from the disposition. Enter as anegative adjustment on line 4j the amountof installment sale income that wasreported for regular tax purposes.

Line 4k—Adjusted Gain or Loss(Including Incentive Stock Options)Adjusted gain or loss. If the estate ortrust sold or exchanged property, or hada casualty gain or loss to business orincome-producing property, it may havean adjustment. The gain or loss on thedisposition of certain assets is refiguredfor AMT purposes. Use this line if theestate or trust reported a gain or loss onForm 4797, Schedule D (Form 1041), orForm 4684 (Section B). When figuring theadjusted basis for those forms, take intoaccount any AMT adjustments made thisyear, or in previous years, for itemsrelated to lines 4e, 4f, 4g, and 4i ofSchedule I. For example, to figure theadjusted basis for AMT purposes, reducethe cost of an asset only by thedepreciation allowed for AMT purposes.

Enter the difference between the gainor loss reported for regular tax purposes,and that figured for AMT purposes. If theAMT gain is less than the gain reportedfor regular tax purposes, enter theadjustment as a negative amount. If theAMT loss is more than the loss allowedfor regular tax purposes, enter theadjustment as a negative amount.Incentive stock options (ISOs). Forregular tax purposes, no income isrecognized when an incentive stockoption (as defined in section 422(b)) isexercised. However, this rule does notapply for AMT purposes. Instead, theestate or trust must generally include online 4k the excess, if any, of:

1. The FMV of the stock acquiredthrough exercise of the option(determined without regard to any lapserestriction) when its rights in the acquiredstock first become transferable or whenthese rights are no longer subject to asubstantial risk of forfeiture, over

2. The amount paid for the stock,including any amount paid for the optionused to acquire the stock.Note: Even if the estate's or trust's rightsin the stock are not transferable and aresubject to a substantial risk of forfeiture,you may elect to include in AMT incomethe excess of the stock's FMV(determined without regard to any lapserestriction) over the exercise price uponthe transfer to the estate or trust of thestock acquired through exercise of theoption. See section 83(b) for more details.The election must be made no later than30 days after the date of transfer.

Increase the AMT basis of any stockacquired through the exercise of anincentive stock option by the amount ofthe adjustment.

Line 4l—Certain Loss Limitations

CAUTION!

If the loss is from a passive activity,use line 4n instead. If the loss isfrom a tax shelter farm activity (that

is not passive), use line 4m.Refigure your allowable losses for AMT

purposes from activities for which you arenot at risk and basis limitations applicableto interests in partnerships and stock inS corporations, by taking into account

your AMT adjustments and tax preferenceitems. See sections 59(h), 465, 704(d),and 1366(d).

Enter the difference between the lossreported for regular tax purposes and theAMT loss. If the AMT loss is more thanthe loss reported for regular tax purposes,enter the adjustment as a negativeamount.

Line 4m—Tax Shelter Farm Activities

TIPUse this line only if the tax shelterfarm activity is not a passiveactivity. Otherwise, use line 4n.

For AMT purposes, no loss is allowedfrom any tax shelter farm activity asdefined in section 58(a)(2).

An excess farm loss from one farmactivity cannot be netted against incomefrom another farm activity. Any disallowedloss (for AMT purposes) is carried forwarduntil offset by income from the sameactivity or when the entire activity is sold.

Include any other adjustment or taxpreference item and your prior year AMTunallowed loss when refiguring the farmloss. For example, if depreciation must berefigured for AMT purposes, include theadjustment on this line. DO NOT includeit again on line 4e, 4r, or 4s.

Determine your tax shelter farm activitygain or loss for AMT purposes using thesame rules you used for regular taxpurposes except that any AMT loss isallowed only to the extent that a taxpayeris insolvent (see section 58(c)(1)). AnAMT loss may not be used in the currenttax year to offset gains from other taxshelter farm activities. Instead, it must besuspended and carried forwardindefinitely until either you have a gain ina subsequent tax year from that same taxshelter farm activity or the activity isdisposed of.

Line 4n—Passive Activities

CAUTION!

Do not enter again elsewhere onthis schedule any AMT adjustmentor tax preference item included on

this line.For AMT purposes, the rules described

in section 469 apply, except that inapplying the limitations, minimum taxrules apply.

Refigure passive activity gains andlosses on an AMT basis. Refigure apassive activity gain or loss by taking intoaccount all AMT adjustments or taxpreference items that pertain to thatactivity.

You may complete a second Form8582 to determine the passive activitylosses allowed for AMT purposes, but donot send this AMT Form 8582 to the IRS.

Enter the difference between the lossreported on page 1, and the AMT loss, ifany.

TIPThe amount of any passive activityloss that is not deductible (and istherefore carried forward) for AMT

purposes is likely to differ from theamount (if any) that is carried forward forregular tax purposes. Therefore, it is

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essential that you retain adequate recordsfor both AMT and regular tax purposes.Publicly traded partnerships (PTPs). Ifthe estate or trust had a loss from a PTP,refigure the loss using any AMTadjustments and tax preference items.

Line 4o—Beneficiaries of Other Trustsor Decedent's EstatesIf the estate or trust is the beneficiary ofanother estate or trust, enter theadjustment for minimum tax purposesfrom line 9, Schedule K-1 (Form 1041).

Line 4p—Tax-Exempt Interest FromSpecified Private Activity BondsEnter the interest earned from specifiedprivate activity bonds reduced (but notbelow zero) by any deduction that wouldhave been allowable if the interest wereincludible in gross income for regular taxpurposes. Specified private activity bondsare any qualified bonds (as defined insection 141) issued after August 7, 1986.See section 57(a)(5) for more information.

Exempt-interest dividends paid by aregulated investment company aretreated as interest from specified privateactivity bonds to the extent the dividendsare attributable to interest received by thecompany on the bonds, minus anallocable share of the expenses paid orincurred by the company in earning theinterest.

Line 4q—DepletionRefigure the depletion deduction for AMTpurposes by using only the income anddeductions allowed for the AMT whenrefiguring the limit based on taxableincome from the property under section613(a) and the limit based on taxableincome, with certain adjustments, undersection 613A(d)(1). Also, the depletiondeduction for mines, wells, and othernatural deposits under section 611 islimited to the property's adjusted basis atthe end of the year, as refigured for theAMT, unless the estate or trust is anindependent producer or royalty ownerclaiming percentage depletion for oil andgas wells. Figure this limit separately foreach property. When refiguring theproperty's adjusted basis, take intoaccount any AMT adjustments made thisyear or in previous years that affect basis(other than the current year's depletion).

Enter on line 4q the difference betweenthe regular tax and AMT deduction. If theAMT deduction is more than the regulartax deduction, enter the difference as anegative amount.

Line 4r—Accelerated Depreciation ofReal Property Placed in Service Before1987For AMT purposes, use the straight linemethod to figure depreciation. Use arecovery period of 19 years for 19-yearreal property and 15 years for low-incomehousing. Enter the excess of depreciationclaimed for regular tax purposes overdepreciation refigured using the straightline method. Figure this amountseparately for each property and includeon line 4r only positive amounts.

Line 4s—Accelerated Depreciation ofLeased Personal Property Placed inService Before 1987For leased personal property other thanrecovery property, enter the amount bywhich the regular tax depreciation usingthe pre-1987 rules exceeds thedepreciation allowable using the straightline method.

For leased 10-year recovery propertyand leased 15-year public utility property,enter the amount by which thedepreciation deduction determined forregular tax purposes is more than thededuction allowable using the straight linemethod with a half-year convention, nosalvage value, and the following recoveryperiod:

Figure this amount separately for eachproperty and include on line 4s onlypositive amounts.

Line 4t—Intangible Drilling Costs

CAUTION!

Do not make this adjustment forcosts for which you elected theoptional 60-month write-off under

section 59(e) for regular tax purposes.Except as provided below, intangible

drilling costs (IDCs) from oil, gas, andgeothermal wells are a tax preferenceitem to the extent that the excess IDCsexceed 65% of the net income from thewells. Figure the tax preference item forall geothermal properties separately fromthe preference for all oil and gasproperties.

Excess IDCs are figured by taking theamount of your IDCs allowed for regulartax purposes under section 263(c) (notincluding any section 263(c) deduction fornonproductive wells) minus the amountthat would have been allowed if thatamount had been amortized over a120-month period starting with the monththe well was placed in production.Note: Cost depletion can be substitutedfor the amount allowed using amortizationover 120 months.

Net income is determined by taking thegross income from all oil, gas, andgeothermal wells reduced by thedeductions allocable to those properties(determined without regard to excessIDCs). When figuring net income, use onlyincome and deductions allowed for theAMT.Exception. The preference for IDCs fromoil and gas wells does not apply totaxpayers who are independent producers(i.e., not integrated oil companies asdefined in section 291(b)(4)). However,this benefit may be limited. First, figurethe IDC preference as if this exception didnot apply. Then, for purposes of thisexception, complete Schedule I throughline 6, including the IDC preference. If theamount of the IDC preference exceeds40% of the amount figured for line 6, enterthe excess on line 4t (the benefit of thisexception is limited). If the amount of theIDC preference is equal to or less than

40% of the amount figured for line 6, donot enter an amount on line 4t (the benefitof this exception is not limited).

Line 4u—Other AdjustmentsInclude on this line:● Net AMT adjustment from an electinglarge partnership. If the estate or trust isa partner in an electing large partnership,include on line 4u the amount fromSchedule K-1 (Form 1065-B), box 6. Takeinto account any amount from ScheduleK-1 (Form 1065-B), box 5, when figuringthe amount to enter on line 4n.● Patron's adjustment. Distributions theestate or trust received from a cooperativemay be includible in income. Unless thedistributions are nontaxable, include online 4u the total AMT patronage dividendadjustment reported to the estate or trustfrom the cooperative.● Section 1202 exclusion. If the estateor trust claimed the exclusion undersection 1202 for gain on qualified smallbusiness stock, multiply the amount of thegain excluded from income (as shown online 6 of Schedule D (Form 1041)) by 42%(.42). Enter the result as a positivenumber.● Related adjustments. AMTadjustments and tax preference itemsmay affect deductions that are based onan income limit other than AGI or modifiedAGI (e.g., farm conservation expenses).Refigure these deductions using theincome limit as modified for the AMT.Include the difference between the regulartax and AMT deduction on line 4u. If theAMT deduction is more than the regulartax deduction, include the difference as anegative amount.Note: Do not make an adjustment on line4u for an item you refigured on anotherline of Schedule I (e.g., line 4q).

Line 7—Alternative Tax Net OperatingLoss Deduction (ATNOLD)For tax years beginning after 1986, thenet operating loss (NOL) under section172(c) is modified for alternative taxpurposes by (a) adding the adjustmentsmade under sections 56 and 58(subtracting if the adjustments arenegative); and (b) reducing the NOL byany item of tax preference under section57 (except the appreciated charitablecontribution preference item). For anestate or trust that held a residual interestin a real estate mortgage investmentconduit (REMIC), figure the ATNOLDwithout regard to any excess inclusion.

When figuring an NOL from a loss yearprior to 1987, the rules in effect beforeenactment of the Tax Reform Act (TRA)of 1986 apply. The NOL under section172(c) is reduced by the amount of the taxpreference items that were taken intoaccount in figuring the NOL. In addition,the NOL is figured by taking into accountonly itemized deductions that werealternative tax itemized deductions for thetax year and that were a modification tothe NOL under section 172(d). Seesections 55(d) and 172 as in effect beforethe TRA of 1986.

10-year property ................................. 15 years15-year public utility property ............. 22 years

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If this estate or trust is the beneficiaryof another estate or trust that terminatedin 1999, include any AMT NOL carryoverthat was reported on line 13e of ScheduleK-1 (Form 1041).

The ATNOLD may be limited. To figurethe ATNOLD limitation, first figure AMTIwithout regard to the ATNOLD. For thispurpose, figure a tentative amount for line4q of Schedule I by treating line 7 as if itwere zero. Then, figure a tentativeamount for line 6 of Schedule I. TheATNOLD limitation is 90% of the tentativeline 6 amount. Enter on line 7 the smallerof the ATNOLD or the ATNOLD limitation.Any alternative tax NOL not used becauseof the ATNOLD limitation can be carriedback or forward. See section 172(b) fordetails. The treatment of alternative taxNOLs does not affect your regular taxNOL.Note: If you elected under section172(b)(3) to forego the carryback periodfor regular tax purposes, the election willalso apply for the AMT.

Line 12—Estate's or Trust's Share ofAlternative Minimum Taxable IncomeFor an estate or trust that held a residualinterest in a REMIC, line 12 may not beless than the estate's or trust's share ofthe amount on Schedule E (Form 1040),line 37, column (c). If that amount is largerthan the amount you would otherwiseenter on line 12, enter that amountinstead and write “Sch. Q” on the dottedline next to line 12.

Part II—Income DistributionDeduction on a Minimum Tax Basis

Line 13—Adjusted AlternativeMinimum Taxable IncomeIf the amount on line 8 of Schedule I isless than zero, and the negative numberis attributable wholly or in part to thecapital loss limitation rules under section1211(b), then enter as a negative numberthe smaller of (a) the loss from line 8; or(b) the loss from line 4 on page 1.

Line 14—Adjusted Tax-Exempt InterestTo figure the adjusted tax-exempt interest(including exempt-interest dividendsreceived as a shareholder in a mutualfund or other regulated investmentcompany), subtract the total of (a) anytax-exempt interest from line 2 ofSchedule A of Form 1041 figured for AMTpurposes; and (b) any section 212expenses allowable for AMT purposesallocable to tax-exempt interest, from theamount of tax-exempt interest received.DO NOT subtract any deductionsreported on lines 4a through 4c. Section212 expenses that are directly allocableto tax-exempt interest are allocated onlyto tax-exempt interest. A reasonableproportion of section 212 expenses thatare indirectly allocable to both tax-exemptinterest and other income must beallocated to each class of income.

Line 16Reduce the amount on line 16 by anyallocable section 1202 exclusion (asrefigured for AMT purposes).

Line 17Enter any capital gains that were paid orpermanently set aside for charitablepurposes from the current year's incomeincluded on line 1 of Schedule A. Reducethe amount on line 17 by any allocablesection 1202 exclusion (as refigured forAMT purposes).

Lines 18 and 19Capital gains and losses must take intoaccount any basis adjustments from line4k, Part I.

Line 24—Adjustment for Tax-ExemptIncomeIn figuring the income distributiondeduction on a minimum tax basis, theestate or trust is not allowed a deductionfor any item of DNAMTI (line 20) that isnot included in the gross income of theestate or trust figured on an AMT basis.Thus, for purposes of figuring theallowable income distribution deductionon a minimum tax basis, the DNAMTI isfigured without regard to any tax-exemptinterest (except for amounts from line 4p).

If tax-exempt interest is the onlytax-exempt income included in the totaldistributions (line 23), and the DNAMTI(line 20) is less than or equal to line 23,then enter on line 24 the amount from line14.

If tax-exempt interest is the onlytax-exempt income included in the totaldistributions (line 23), and the DNAMTI ismore than line 23 (i.e., the estate or trustmade a distribution that is less than theDNAMTI), then figure the adjustment bymultiplying line 14 by a fraction, thenumerator of which is the totaldistributions (line 23), and thedenominator of which is the DNAMTI (line20). Enter the result on line 24.

If line 23 includes tax-exempt incomeother than tax-exempt interest (except foramounts from line 4p), figure line 24 bysubtracting the total expenses allocableto tax-exempt income that are allowablefor AMT purposes from tax-exemptincome included on line 23.

Expenses that are directly allocable totax-exempt income are allocated only totax-exempt income. A reasonableproportion of expenses indirectly allocableto both tax-exempt income and otherincome must be allocated to each classof income.

Line 27—Income DistributionDeduction on a Minimum Tax BasisAllocate the income distribution deductionfigured on a minimum tax basis amongthe beneficiaries in the same manner asincome was allocated for regular taxpurposes. Report each beneficiary's shareon line 7 of Schedule K-1 (Form 1041).

Part III—Alternative Minimum TaxComputation

Line 36—Alternative Minimum ForeignTax Credit

TIPTo see if you need to figure theestate's or trust's AMT foreign taxcredit, fill in line 38 of Schedule I

as instructed. If the amount on line 38 isgreater than or equal to the amount online 35, the estate or trust does not owethe AMT. Enter zero on line 39 and seeWho Must Complete on page 19 to findout if you must file Schedule I with Form1041. However, even if the estate or trustdoes not owe AMT, you may need tocomplete line 36 to see if you have anAMT foreign tax credit carryback orcarryforward to other tax years.

To figure the AMT foreign tax credit:1. Complete and attach a separate

AMT Form 1116, with the notation at thetop, “Alt Min Tax” for each separatelimitation category specified at the top ofForm 1116.Note: When applying the separatelimitation categories, use the applicableAMT rate instead of the regular tax rateto determine if any income is“high-taxed.”

2. If you previously made or aremaking the simplified limitation election(see page 24), skip Part I and enter on theAMT Form 1116, line 16, the sameamount you entered on that line for theregular tax.

Otherwise, complete Part I, using onlyincome and deductions allowed for theAMT that are attributable to sourcesoutside the United States. If theInstructions for Form 1116 require you tocomplete Worksheet A or B, you must firstcomplete an AMT Worksheet for line 17,following the Instructions under 5 below.

3. Complete Part II and lines 9through 13 of the AMT Form 1116. Usethe estate's or trust's AMT foreign taxcredit carryover, if any, on line 10.

4. If the simplified limitation electiondoes not apply, complete lines 14 through16 of the AMT Form 1116.

5. If you did not complete ScheduleD (Form 1041) for the regular tax and didnot complete Part IV of Schedule I ofForm 1041, enter the AMTI from ScheduleI, line 12, on line 17 of the AMT Form1116 and go to 6 on page 24. Otherwise,follow these steps to complete, for theAMT, the Worksheet for line 17 in theForm 1116 instructions:

a. Enter the amount from Schedule Iof Form 1041, line 12, on line 1 of theAMT Worksheet for line 17.

b. Complete Parts I, II, III, and IV andlines 19 through 26 of a Schedule D(Form 1041) for the AMT as described inthe instructions for lines 41, 42, 44, and48 on page 24 (or, if you alreadycompleted an AMT Schedule D tocomplete Part IV of Schedule I of Form1041, use that Schedule D). Next enterthe amount from Schedule I of Form1041, line 34, on line 18 of your AMTSchedule D. Then complete lines 27

Page 23

through 49 of the AMT Schedule D (youmay skip lines 32, 36, 40, and 46).

c. Complete the rest of the AMTWorksheet for Line 17 using amountsfrom the AMT Schedule D.

6. Enter the amount from ScheduleI, line 35, on the AMT Form 1116, line 19.Complete lines 18, 20, and 21 of the AMTForm 1116.

7. Complete Part IV of the first AMTForm 1116.

Follow the instructions below to figurethe amount to enter on line 36 ofSchedule I of Form 1041.

If you have no entry on line 7 ofSchedule I of Form 1041, and nointangible drilling costs (IDCs) (or theexception for IDCs does not apply to theestate or trust—see the instructions forline 4t on page 22), enter on line 36 ofSchedule I the smaller of:● 90% of line 35 of Schedule I, or● The amount from line 32 of the firstAMT Form 1116.

If you have an entry on line 7 or theexception for IDCs applies to the estateor trust:

1. Figure the amount of tax that wouldbe on line 35 if line 7 were zero and theexception did not apply.

2. Multiply the amount from 1 aboveby 10%.

3. Subtract the amount from 2 abovefrom the tax on line 35.

4. Enter on Schedule I, line 36, thesmaller of the amount from 3 above orthe amount from line 32 of the first AMTForm 1116.

AMT foreign tax credit carryback andcarryforward. If the AMT foreign taxcredit is limited, any unused amount canbe carried back or forward in accordancewith sections 59(a)(2)(B) and 904(c).Note: The election to forego thecarryback period for regular tax purposesalso applies for the AMT.Simplified limitation election. Theestate or trust may elect to use asimplified section 904 limitation to figureits AMT foreign tax credit. To do so, usethe estate's or trust's regular tax incomefor Form 1116, Part I, instead of refiguringthe estate's or trust's foreign sourceincome for the AMT, as described in 2 onpage 23. The estate or trust must makethe election for the first tax year after 1997for which it claims an alternative minimumtax foreign tax credit. If it does not makethe election for that year, it cannot makeit for a later year. Once made, the electionapplies to all later tax years and can onlybe revoked with IRS consent.

Part IV—Line 35 ComputationUsing Maximum Capital GainsRatesLines 41, 42, 44, and 48. You generallymay enter the amounts from Schedule D(Form 1041), lines 26, 24, and 21, onSchedule I, lines 41, 42, and 44,respectively. But do not use thoseamounts if either of the following apply:

1. Any gain or loss on Schedule D isdifferent for the AMT (e.g., because of a

different basis for the AMT due todepreciation adjustments or an incentivestock option adjustment).

2. You did not complete Part V ofSchedule D.

Complete a Schedule D (Form 1041)for the AMT. If 1 above applies, refigurethe amounts for Schedule D, Parts I, II, III,and IV for the AMT; otherwise, use theregular tax amounts. Next, complete lines19 through 26 of the AMT Schedule D.Enter the amounts from lines 26, 24, and21 of the AMT Schedule D on ScheduleI, lines 41, 42, and 44, respectively. Keepthe AMT Schedule D for your records, butdo not attach it to Form 1041.

Do not refigure the amount fromSchedule D, line 35, when completingSchedule I, line 48. If you did notcomplete Part V of Schedule D for theregular tax, enter zero on Schedule I,line 48.Note: Do not decrease the estate's ortrust's section 1202 exclusion by theamount, if any, included on line 4u.

Schedule D (Form 1041)—Capital Gains and Losses

General Instructions

Purpose of FormUse Schedule D (Form 1041) to reportgains and losses from the sale orexchange of capital assets by an estateor trust.

To report sales or exchanges ofproperty other than capital assets,including the sale or exchange of propertyused in a trade or business andinvoluntary conversions (other thancasualties and thefts), see Form 4797 andrelated instructions.

If property is involuntarily convertedbecause of a casualty or theft, use Form4684.

Section 1256 contracts and straddlesare reported on Form 6781, Gains andLosses From Section 1256 Contracts andStraddles.

Capital AssetEach item of property held by the estateor trust (whether or not connected with itstrade or business) is a capital assetexcept:● Inventoriable assets or property heldprimarily for sale to customers;● Depreciable or real property used in atrade or business;● Certain copyrights, literary, musical, orartistic compositions, letters ormemoranda, or similar property;● Accounts or notes receivable acquiredin the ordinary course of a trade orbusiness for services rendered or from thesale of inventoriable assets or propertyheld primarily for sale to customers; and● Certain U.S. Government publicationsnot purchased at the public sale price.

You may find additional helpfulinformation in the following publications:

● Pub. 544, Sales and Other Dispositionsof Assets and● Pub. 551, Basis of Assets.

Short-Term or Long-TermSeparate the capital gains and lossesaccording to how long the estate or trustheld or owned the property. The holdingperiod for short-term capital gains andlosses is 1 year or less. The holdingperiod for long-term capital gains andlosses is more than 1 year. Propertyacquired by a decedent's estate from thedecedent is considered as held for morethan 1 year.

When you figure the length of theperiod the estate or trust held property,begin counting on the day after the estateor trust acquired the property and includethe day the estate or trust disposed of it.Use the trade dates for the date ofacquisition and sale of stocks and bondstraded on an exchange or over-the-counter market.

Section 643(e)(3) ElectionFor noncash property distributions, afiduciary may elect to have the estate ortrust recognize gain or loss in the samemanner as if the distributed property hadbeen sold to the beneficiary at its FMV.The distribution deduction is theproperty's FMV. This election applies toall distributions made by the estate ortrust during the tax year and, once made,may be revoked only with IRS consent.

Note that section 267 does not allow atrust or a decedent's estate to claim adeduction for any loss on property towhich a section 643(e)(3) election applies.In addition, when a trust or a decedent'sestate distributes depreciable property,section 1239 applies to deny capital gainstreatment for any gain on property towhich a section 643(e)(3) election applies.

Related PersonsA trust cannot deduct a loss from the saleor exchange of property directly orindirectly between any of the following:● A grantor and a fiduciary of a trust;● A fiduciary and a fiduciary or beneficiaryof another trust created by the samegrantor;● A fiduciary and a beneficiary of thesame trust;● A trust fiduciary and a corporation ofwhich more than 50% in value of theoutstanding stock is owned directly orindirectly by or for the trust or by or for thegrantor of the trust; or● An executor of an estate and abeneficiary of that estate, except when thesale or exchange is to satisfy a pecuniarybequest (i.e., a bequest of a sum ofmoney).

Items for Special TreatmentThe following items may require specialtreatment:● Exchange of “like-kind” property.● Wash sales of stock or securities(including contracts or options to acquireor sell stock or securities) (section 1091).

Page 24

● Gain or loss on options to buy or sell(section 1234).● Certain real estate subdivided for salethat may be considered a capital asset(section 1237).● Gain on disposition of stock in aninterest charge domestic internationalsales corporation (section 995(c)).● Gain on the sale or exchange of stockin certain foreign corporations (section1248).● Sales of stock received under aqualified public utility dividendreinvestment plan. See Pub. 550 fordetails.● Transfer of appreciated property to apolitical organization (section 84).● Disposition of market discount bonds(section 1276).

Constructive Sales Treatment forCertain Appreciated PositionsGenerally, the estate or trust mustrecognize gain (but not loss) on the dateit enters into a constructive sale of anyappreciated position in stock, apartnership interest, or certain debtinstruments as if the position weredisposed of at FMV on that date.

The estate or trust is treated as makinga constructive sale of an appreciatedposition when it (or a related person, insome cases) does one of the following:● Enters into a short sale of the same orsubstantially identical property (i.e., a“short sale against the box”).● Enters into an offsetting notionalprincipal contract relating to the same orsubstantially identical property.● Enters into a futures or forward contractto deliver the same or substantiallyidentical property.● Acquires the same or substantiallyidentical property (if the appreciatedposition is a short sale, offsetting notionalprincipal contract, or a futures or forwardcontract).

Exception. Generally, constructive saletreatment does not apply if:● The estate or trust closed thetransaction before the end of the 30th dayafter the end of the year in which it wasentered into,● The estate or trust held the appreciatedposition to which the transaction relatesthroughout the 60-day period starting onthe date the transaction was closed, and● At no time during that 60-day periodwas the estate's or trust's risk of lossreduced by holding certain otherpositions.

For details and other exceptions tothese rules, see Pub. 550.

Exclusion of Gain on Qualified SmallBusiness Stock (Section 1202)Section 1202 provides for an exclusion of50% of the gain on the sale or exchangeof qualified small business stock. Thesection 1202 exclusion applies only toqualified small business stock issued afterAugust 10, 1993, and held for more than5 years. To be qualified small business

stock, the stock must meet all of thefollowing tests:● It must be stock in a C corporation (i.e.,not S corporation stock).● It must have been originally issued afterAugust 10, 1993.● As of the date the stock was issued, thecorporation was a qualified smallbusiness. A qualified small business is adomestic C corporation with total grossassets of $50 million or less (a) at alltimes after August 9, 1993, and before thestock was issued, and (b) immediatelyafter the stock was issued. Gross assetsinclude those of any predecessor of thecorporation. All corporations that aremembers of the same parent-subsidiarycontrolled group are treated as onecorporation.● The estate or trust acquired the stockat its original issue (either directly orthrough an underwriter), either inexchange for money or other property oras pay for services (other than as anunderwriter) to the corporation. In certaincases, the estate or trust may meet thetest if it acquired the stock from anotherperson who met this test (such as by giftor at death) or through a conversion orexchange of qualified small businessstock the estate or trust held.● During substantially all the time theestate or trust held the stock:

1. The corporation was a Ccorporation,

2. At least 80% of the value of thecorporation's assets were used in theactive conduct of one or more qualifiedbusinesses (defined below), and

3. The corporation was not a foreigncorporation, DISC, former DISC,corporation that has made (or that has asubsidiary that has made) a section 936election, regulated investment company,real estate investment trust, REMIC,FASIT, or cooperative.Note: A specialized small businessinvestment company (SSBIC) is treatedas having met test 2 above.

A qualified business is any businessother than the following:● One involving services performed in thefields of health, law, engineering,architecture, accounting, actuarialscience, performing arts, consulting,athletics, financial services, or brokerageservices.● One whose principal asset is thereputation or skill of one or moreemployees.● Any banking, insurance, financing,leasing, investing, or similar business.● Any farming business (including theraising or harvesting of trees).● Any business involving the productionof products for which percentagedepletion can be claimed.● Any business of operating a hotel,motel, restaurant, or similar business.

For more details about limits andadditional requirements that may apply,see section 1202.

Pass-through entities. If the estate ortrust held an interest in a pass-throughentity (a partnership, S corporation,mutual fund, or other regulatedinvestment company) that sold qualifiedsmall business stock, the estate or trustgenerally must have held the interest onthe date the pass-through entity acquiredthe qualified small business stock and atall times thereafter until the stock wassold to qualify for the exclusion.How to report. Report in column (f) ofline 6 the entire gain realized on the saleof qualified small business stock. Incolumn (g) of line 6, report as 28% rategain an amount equal to the section 1202exclusion. Complete all other columns asindicated. Directly below the line on whichyou reported the gain, enter in column (a)“Section 1202 exclusion,” and enter as a(loss) in column (f) the amount of theallowable exclusion. Also include 42% ofthe exclusion as a positive amount onSchedule I, line 4u.

Gain from Form 1099-DIV. If theestate or trust received a Form 1099-DIVwith a gain in box 2d, part or all of thatgain (which is also included in box 2a)may be eligible for the section 1202exclusion. In column (a) of line 6, enterthe name of the corporation whose stockwas sold. In column (f), enter the amountof the allowable exclusion as a (loss). Incolumn (g), enter the amount of theallowable exclusion as a gain.

Gain from Form 2439. If the estateor trust received a Form 2439, Notice toShareholder of Undistributed Long-TermCapital Gains, with a gain in box 1d, partor all of that gain (which is also includedin box 1a) may be eligible for the section1202 exclusion. In column (a) of line 6,enter the name of the corporation whosestock was sold. In column (f), enter theamount of the allowable exclusion as a(loss). In column (g), enter the amount ofthe allowable exclusion as a gain.

Rollover of Gain From Qualified StockIf the estate or trust held qualified smallbusiness stock (as defined above) formore than 6 months, it may elect topostpone gain if it purchased otherqualified small business stock during the60-day period that began on the date ofthe sale.

The estate or trust must recognize gainto the extent the sale proceeds exceedthe cost of the replacement stock.Reduce the basis of the replacementstock by any postponed gain.

The estate or trust must make theelection no later than the due date(including extensions) for filing Form 1041for the tax year in which the stock wassold. If the original Form 1041 was filedon time, the election may be made on anamended return filed no later than 6months after the due date of the originalreturn (excluding extensions). Write“Filed pursuant to section 301.9100-2” atthe top of the amended return, and file itat the same address used for the originalForm 1041.

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To make the election, report the entiregain realized on the sale on line 1 or 6.Directly below the line on which youreported the gain, enter in column (a)“Section 1045 Rollover” and enter as a(loss) in column (f) the amount of thepostponed gain.

Specific Instructions

Lines 1 and 6Short-term and long-term capital gainsand losses. Enter all sales of stocks,bonds, etc.Redemption of stock to pay deathtaxes. If stock is redeemed under theprovisions of section 303, list and identifyit on line 6 and give the name of thedecedent and the IRS office where theestate tax or generation-skipping transfertax return was filed.

If you are reporting capital gain from alump-sum distribution, see the instructionsfor Form 4972 for information about theFederal estate tax.

Column (d)—Sales PriceEnter either the gross sales price or thenet sales price from the sale. On sales ofstocks and bonds, report the grossamount as reported to the estate or truston Form 1099-B or similar statement.However, if the estate or trust wasadvised that gross proceeds lesscommissions and option premiums werereported to the IRS, enter that net amountin column (d).

Column (e)—Cost or Other BasisBasis of trust property. Generally, thebasis of property acquired by gift is thesame as the basis in the hands of thedonor. If the FMV of the property at thetime it was transferred to the trust is lessthan the transferor's basis, then the FMVis used for determining any loss ondisposition.

If the property was transferred to thetrust after 1976, and a gift tax was paidunder Chapter 12, then increase thedonor's basis as follows:

Multiply the amount of the gift tax paidby a fraction, the numerator of which isthe net appreciation in value of the gift(discussed below), and the denominatorof which is the amount of the gift. For thispurpose, the net appreciation in valueof the gift is the amount by which theFMV of the gift exceeds the donor'sadjusted basis.Basis of decedent's estate property.Generally, the basis of property acquiredby a decedent's estate is the FMV of theproperty at the date of the decedent'sdeath, or the alternate valuation date if theexecutor elected to use an alternatevaluation under section 2032.

See Pub. 551 for a discussion of thevaluation of qualified real property undersection 2032A.Basis of property for bankruptcyestates. Generally, the basis of propertyheld by the bankruptcy estate is the sameas the basis in the hands of the individualdebtor.

Adjustments to basis. Before figuringany gain or loss on the sale, exchange,or other disposition of property owned bythe estate or trust, adjustments to theproperty's basis may be required.

Some items that may increase thebasis include:

1. Broker's fees and commissions.2. Reinvested dividends that were

previously reported as income.3. Reinvested capital gains that were

previously reported as income.4. Costs that were capitalized.5. Original issue discount that has

been previously included in income.Some items that may decrease the

basis include:1. Nontaxable distributions that

consist of return of capital.2. Deductions previously allowed or

allowable for depreciation.3. Casualty or theft loss deductions.

See Pub. 551 for additional information.See section 852(f) for treatment of load

charges incurred in acquiring stock in aregulated investment company.Carryover basis. Carryover basisdetermined under repealed section 1023applies to property acquired from adecedent who died after December 31,1976, and before November 7, 1978, onlyif the executor elected it on a Form5970-A, Election of Carryover Basis, thatwas filed on time.

Column (f)—Gain or (Loss)Make a separate entry in this column foreach transaction reported on lines 1 and6 and any other lines that apply to theestate or trust. For lines 1 and 6, subtractthe amount in column (e) from the amountin column (d). Enter negative amounts inparentheses.

Column (g)—28% Rate Gain or (Loss)Enter in column (g) only the amount, ifany, from Part II, column (f), that is equalto the amount of the estate's or trust'ssection 1202 exclusion from the eligiblegain on qualified small business stock(see page 25) or from collectibles gainsand losses. A collectibles gain or lossis any long-term gain or loss from the saleor exchange of a collectible that is acapital asset.

Collectibles includes works of art,rugs, antiques, metals (such as gold,silver, and platinum bullion), gems,stamps, coins, alcoholic beverages, andcertain other tangible property.

Also include gain from the sale of aninterest in a partnership, S corporation,or trust attributable to unrealizedappreciation of collectibles.

Lines 2 and 7Undistributed capital gains. Include online 7, column (f), the amount from box1a of Form 2439. This represents theestate's or trust's share of theundistributed long-term capital gains ofthe regulated investment company(mutual fund) or real estate investmenttrust.

Include on line 7, column (g), theamount, if any, from box 1b of Form 2439.If there is an amount in box 1c of Form2439, see the worksheet for line 15b onpage 27. If there is an amount in box 1dof Form 2439, see Exclusion of Gain onQualified Small Business Stock(Section 1202) on page 25.

Enter on Form 1041, line 24f, the taxpaid as shown in box 2 of Form 2439. Addto the basis of your stock the excess ofthe amount included in income over theamount of the credit for tax paid. See Pub.550 for more details.Installment sales. If the estate or trustsold property at a gain during the tax year,and will receive a payment in a later taxyear, report the sale on the installmentmethod and file Form 6252, InstallmentSale Income, unless you elect not to doso.

Also, use Form 6252 to report anypayment received in 1999 from a salemade in an earlier tax year that wasreported on the installment method.

To elect out of the installment method,report the full amount of the gain on atimely filed return (including extensions).If the original return was filed on time, theelection may be made on an amendedreturn filed no later than 6 months afterthe due date of the original return(excluding extensions). Write “Filedpursuant to section 301.9100-2” at the topof the amended return, and file it at thesame address used for the original Form1041.Exchange of “like-kind” property.Generally, no gain or loss is recognizedwhen property held for productive use ina trade or business or for investment isexchanged solely for property of alike-kind to be held either for productiveuse in a trade or business or forinvestment. However, if a trust exchangeslike-kind property with a related person(see Related Persons on page 24), andbefore 2 years after the date of the lasttransfer that was part of the exchange therelated person disposes of the property,or the trust disposes of the propertyreceived in exchange from the relatedperson, then the original exchange will notqualify for nonrecognition. See section1031(f) for exceptions.

Complete and attach Form 8824,Like-Kind Exchanges, to Form 1041 foreach exchange.

Line 9—Capital Gain DistributionsEnter as a long-term capital gain on line9, column (f), the total capital gaindistributions paid during the year,regardless of how long the estate or trustheld its investment. Enter on line 9,column (g), the total of the amountsreported as the 28% rate gain portion oftotal capital gain distributions.

Line 14, Column (1)—Beneficiaries' NetShort-Term Capital Gain or LossEnter the amount of net short-term capitalgain or loss allocable to the beneficiaryor beneficiaries. Except in the final year,include only those short-term capitallosses that are taken into account in

Page 26

determining the amount of gain from thesale or exchange of capital assets that ispaid, credited, or required to bedistributed to any beneficiary during thetax year. See Regulations section1.643(a)-3 for more information aboutallocation of capital gains and losses.

Except in the final year, if the lossesfrom the sale or exchange of capitalassets are more than the gains, all of thelosses must be allocated to the estate ortrust and none are allocated to thebeneficiaries.

Line 14, Column (2)—Estate's orTrust's Net Short-Term Capital Gain orLossEnter the amount of the net short-termcapital gain or loss allocable to the estateor trust. Include any capital gain paid orpermanently set aside for a charitablepurpose specified in section 642(c).

Line 14, Column (3)—TotalEnter the total of the amounts entered incolumns (1) and (2). The amount incolumn (3) should be the same as theamount on line 5.

Line 15—Net Long-Term Capital Gainor LossAllocate the net long-term capital gain orloss on line 15 in the same manner as thenet short-term capital gain or loss on line14. However, do not take the section1202 exclusion on gain from the sale orexchange of qualified small businessstock into account when figuring netlong-term capital gain or loss allocable tothe beneficiaries.

Line 15b—Unrecaptured Section 1250GainComplete the worksheet on this page ifany of the following apply.● During the tax year, the estate or trustsold or otherwise disposed of section1250 property (generally, real propertythat was depreciated) held more than 1year.● The estate or trust received installmentpayments during the tax year for section1250 property held more than 1 year forwhich it is reporting gain on theinstallment method.● The estate or trust received a ScheduleK-1 from an estate or trust, partnership,or S corporation that shows “unrecapturedsection 1250 gain” reportable for the taxyear.● The estate or trust received a Form1099-DIV or Form 2439 from a real estateinvestment trust or regulated investmentcompany (including a mutual fund) thatreports “unrecaptured section 1250 gain”for the tax year.● The estate or trust reported a long-termcapital gain from the sale or exchange ofan interest in a partnership that ownedsection 1250 property.

Instructions for the UnrecapturedSection 1250 Gain WorksheetLines 1 through 3. If the estate or trusthad more than one property described online 1, complete lines 1 through 3 for each

property on a separate worksheet. Enterthe total of the line 3 amounts for allproperties on line 3 and go to line 4.Line 4. To figure the amount to enter online 4, follow the steps below.

Step 1. For each installment sale oftrade or business property held more than1 year, figure the smaller of (a) thedepreciation allowed or allowable or (b)the total gain for the sale. This is thesmaller of line 22 or line 24 of the 1999

Form 4797 (or the comparable lines ofForm 4797 for the year of sale) for eachproperty sold.

Step 2. Then, reduce the amount byany section 1250 ordinary incomerecapture for that sale. This is the amountfrom line 26g of the 1999 Form 4797 (orthe comparable line of Form 4797 for theyear of sale) for each property sold. Theresult is the total unrecaptured section1250 gain that must be allocated to the

Unrecaptured Section 1250 Gain Worksheet—Line 15b(keep for your records)

If the estate or trust had a section 1250 property in Part IIIof Form 4797 for which there was an entry in column (g) ofPart I of Form 4797 (but not on Form 6252), enter the smallerof line 22 or line 24 of Form 4797 for that property. If theestate or trust had more than one such property, seeinstructions Enter the amount from Form 4797, line 26g, for the propertyfor which you made an entry on line 1Subtract line 2 from line 1

Enter the total of any amounts reported to the estate or truston Schedules K-1 from a partnership or an S corporation as“unrecaptured section 1250 gain”Add lines 3 through 5Enter the smaller of line 6 or the gain, ifany, from Form 4797, line 7Enter the amount, if any, from Form 4797,line 8Subtract line 8 from line 7. If zero or less, enter -0-

Enter the total of any amounts reported to the estate or truston Schedules K-1 and Forms 1099-DIV and 2439 as“unrecaptured section 1250 gain” from an estate, trust, realestate investment trust, or mutual fund (or other regulatedinvestment company)

● If the result is zero or a gain, enter -0-.

Subtract line 15 from line 12. If zero or less, enter -0-. Enterthe result in the appropriate columns of Schedule D, line15b

1.

2.

3.

5.

6.7.

8.

9.

1.

2.3.

5.6.

8.

11.12.

11.

12.13.

14.

14.

13.

7.

9.

Add lines 9 through 11Enter the gain or (loss) from Schedule D,line 12

15.

16.

Enter the (loss), if any, from Schedule D,line 5. If Schedule D, line 5, is zero or again, enter -0-

16.

Combine lines 13 and 14.

● If the result is a (loss), enter it as a positive amount

Enter the total unrecaptured section 1250 gain from sales(including installment sales) or other dispositions of section1250 property held more than 1 year (but not included onany of the above lines). Also include gain from the sale orexchange of an interest in a partnership attributable tounrecaptured section 1250 gain (see instructions) 10.

10.

15.

Enter the total unrecaptured section 1250 gain included online 26 or 37 of Form(s) 6252 from installment sales of tradeor business property held more than 1 year (see instructions)

4.

4.

If any of the following apply, you do not have to complete all of the worksheet.Instead, follow the instructions below:

● Go to line 4 if the estate’s or trust’s only unrecaptured section 1250 gain is froman installment sale of trade or business property held more than 1 year that theestate or trust is reporting on Form 6252.

● Go to line 5 if the estate’s or trust’s only unrecaptured section 1250 gain is froma Schedule K-1 reporting such gain from a partnership or S corporation.

● Go to line 10 if the estate’s or trust’s only unrecaptured section 1250 gain is froma sale (including an installment sale) or other disposition of section 1250 propertyheld more than 1 year, but that is not being reported in Part I of Form 4797.

● Go to line 10 if the estate’s or trust’s only unrecaptured section 1250 gain is fromthe sale or exchange of an interest in a partnership.

● Go to line 11 if the estate’s or trust’s only unrecaptured section 1250 gain is froma Schedule K-1, Form 1099-DIV, or Form 2439 reporting such gain from an estate,trust, real estate investment trust, or regulated investment company (including amutual fund).

Page 27

installment payments received from thesale.

Step 3. Generally, the amount ofsection 1231 gain on each installmentpayment is treated as unrecapturedsection 1250 gain until the totalunrecaptured section 1250 gain figured instep 2 has been used in full. However, ifthe amount the estate or trust treated asunrecaptured section 1250 gain for anyinstallment payment received after May6, 1997, and before August 24, 1999, isless than the amount that would havebeen so treated under the previoussentence, you must use the smalleramount to figure any remainingunrecaptured section 1250 gain.Therefore, the amount of gain treated asunrecaptured section 1250 gain for eachinstallment payment received after August23, 1999, is the smaller of (a) the amountfrom line 26 or line 37 of the 1999 Form6252, whichever applies, that is allocableto that installment payment or (b) the totalunrecaptured section 1250 gain for thesale, reduced by the amount of gaintreated as unrecaptured section 1250gain for all prior installment payments.This method also may be used to figurethe amount of unrecaptured section 1250gain allocable to installment paymentsreceived during the tax year beforeAugust 24, 1999. For more details, seeRegulations section 1.453-12.

Step 4. Enter on line 4 the totalunrecaptured section 1250 gain allocableto all installment payments receivedduring the tax year.Line 10. To figure the amount to enteron line 10, follow the applicableinstructions below.

Installment sales. Follow the stepsbelow to figure the amount to include online 10.● Step 1. For each installment sale ofproperty held more than 1 year (but notincluded on line 4), figure the smaller of(a) the depreciation allowed or allowableor (b) the total gain for the sale. This isthe smaller of line 22 or line 24 of the1999 Form 4797 (or comparable lines ofForm 4797 for the year of sale) for eachproperty sold.● Step 2. Reduce the amount from step1 by any section 1250 ordinary incomerecapture for that sale. This is the amountfrom line 26g of the 1999 Form 4797 (orthe comparable line of Form 4797 for theyear of sale) for each property sold. Theresult is your total unrecaptured section1250 gain that must be allocated to theinstallment payments received from thesale.● Step 3. Generally, the amount of capitalgain on each installment payment istreated as unrecaptured section 1250gain until the total unrecaptured section1250 gain figured in step 2 has been usedin full. However, if the amount treated asunrecaptured section 1250 gain for anyinstallment payment received after May6, 1997, and before August 24, 1999, isless than the amount that would havebeen so treated under the previoussentence, use the smaller amount tofigure any remaining unrecaptured section

1250 gain. Therefore, the amount of gaintreated as unrecaptured section 1250gain for each installment paymentreceived after August 23, 1999, is thesmaller of (a) the amount from line 26 orline 37 of the 1999 Form 6252, whicheverapplies, that is allocable to that installmentpayment or (b) your total unrecapturedsection 1250 gain for the sale, reducedby the amount of gain treated asunrecaptured section 1250 gain for allprior installment payments. This methodalso may be used to figure the amount ofunrecaptured section 1250 gain allocableto installment payments received duringthe tax year before August 24, 1999. Formore details, see Regulations section1.453-12.● Step 4. Include on line 10 the totalunrecaptured section 1250 gain allocableto all installment payments receivedduring the tax year.

Other sales or dispositions ofsection 1250 property. For each saleof property held more than 1 year (but notincluded on line 1), figure the smaller of(a) the depreciation allowed or allowableor (b) the total gain for the sale. This isthe smaller of line 22 or line 24 of the1999 Form 4797 (or the comparable linesof Form 4797 for the year of sale) for eachproperty sold. Then, reduce that amountby any section 1250 ordinary incomerecapture for that sale. This is the amountfrom line 26g of the 1999 Form 4797 (orthe comparable line of Form 4797 for the

year of sale) for each property sold. Theresult is your total unrecaptured section1250 gain that must be included online 10.

Sale or exchange of a partnershipinterest held more than 1 year. Includeon line 10 the estate's or trust's share ofthe partnership's unrecaptured section1250 gain that would result if thepartnership had transferred all of itssection 1250 property in a fully taxabletransaction immediately before you soldor exchanged your interest in thatpartnership. If the estate or trustrecognized less than all of the realizedgain, the partnership will be treated ashaving transferred only a proportionateamount of each section 1250 property.

Part IV—Capital Loss LimitationIf the sum of all the capital losses is morethan the sum of all the capital gains, thenthese capital losses are allowed as adeduction only to the extent of the smallerof the net loss or $3,000.

For any year (including the final year)in which capital losses exceed capitalgains, the estate or trust may have acapital loss carryover. Use the CapitalLoss Carryover Worksheet below tofigure any capital loss carryover. A capitalloss carryover may be carried forwardindefinitely. Capital losses keep theircharacter as either short-term orlong-term when carried over to thefollowing year.

6.

Capital Loss Carryover Worksheet(keep for your records)

Enter taxable income (or loss) from Form 1041, line 22Enter loss from line 17 of Schedule D as a positive amountEnter amount from Form 1041, line 20Adjusted taxable income. Combine lines 1, 2, and 3, but donot enter less than zeroEnter the smaller of line 2 or line 4

Enter loss from Schedule D, line 5, as a positive amountEnter gain, if any, from Schedule D, line13. If that line is blank or shows a loss,enter -0-Add lines 5 and 7Short-term capital loss carryover to 2000. Subtract line 8from line 6. If zero or less, enter -0-. If this is the final returnof the estate or trust, also enter on Schedule K-1 (Form1041), line 13b

Enter loss from Schedule D, line 13, as a positive amountEnter gain, if any, from Schedule D, line 5. Ifthat line is blank or shows a loss, enter -0-Subtract line 6 from line 5. If zero or less,enter -0-Add lines 11 and 12

Use this worksheet to figure your capital loss carryovers from 1999 to 2000 ifSchedule D, line 17, is a loss and (a) the loss on Schedule D, line 16, column (3),is more than $3,000, OR (b) Form 1041, line 22 is a loss.

1.2.3.4.

5.

6.7.

8.9.

1.2.3.

4.5.

7.8.

9.

10.11.

12.

13.

10.

12.

11.

13.

Note: If line 5 of Schedule D is a loss, go to line 6; otherwise,enter -0- on line 6 and go to line 10.

Note: If line 13 of Schedule D is a loss, go to line 10;otherwise, skip lines 10 through 14.

Long-term capital loss carryover to 2000. Subtract line 13from line 10. If zero or less, enter -0-. If this is the final returnof the estate or trust, also enter on Schedule K-1 (Form1041), line 13c

14.

14.

Page 28

Part V—Tax Computation UsingMaximum Capital Gains Rates

Line 21If the estate or trust received capital gainsthat were derived from income in respectof a decedent, and a section 691(c)(4)deduction was claimed, then line 21 mustbe reduced by the portion of the section691(c)(4) deduction claimed on Form1041, page 1, line 19.

Line 53If the tax using the maximum capital gainsrates (line 51) is less than the regular tax(line 52), enter the amount from line 53on line 1a of Schedule G, Form 1041, andcheck the “Schedule D” box.

Schedule J (Form 1041) —Accumulation Distributionfor Certain Complex Trusts

General InstructionsUse Schedule J (Form 1041) to report anaccumulation distribution for a domesticcomplex trust that was:● Previously treated at any time as aforeign trust (unless an exception isprovided in future regulations) or● Created before March 1, 1984, unlessthat trust would not be aggregated withother trusts under the rules of section643(f) if that section applied to the trust.

An accumulation distribution is theexcess of amounts properly paid,credited, or required to be distributed(other than income required to bedistributed currently) over the DNI of thetrust reduced by income required to bedistributed currently. To have anaccumulation distribution, the distributionmust exceed the accounting income of thetrust.

Specific Instructions

Part I—Accumulation Distribution in1999

Line 1—Distribution Under Section661(a)(2)Enter the amount from Schedule B ofForm 1041, line 10, for 1999. This is theamount properly paid, credited, orrequired to be distributed other than theamount of income for the current tax yearrequired to be distributed currently.

Line 2—Distributable Net IncomeEnter the amount from Schedule B ofForm 1041, line 7, for 1999. This is theamount of distributable net income (DNI)for the current tax year determined undersection 643(a).

Line 3—Distribution Under Section661(a)(1)Enter the amount from Schedule B ofForm 1041, line 9, for 1999. This is theamount of income for the current tax yearrequired to be distributed currently.

Line 5—Accumulation DistributionIf line 11, Schedule B of Form 1041 ismore than line 8, Schedule B of Form1041, complete the rest of Schedule J andfile it with Form 1041, unless the trust hasno previously accumulated income.

Generally, amounts accumulatedbefore a beneficiary reaches age 21 maybe excluded by the beneficiary. Seesections 665 and 667(c) for exceptionsrelating to multiple trusts. The trusteereports to the IRS the total amount of theaccumulation distribution before anyreduction for income accumulated beforethe beneficiary reaches age 21. If themultiple trust rules do not apply, thebeneficiary claims the exclusion whenfiling Form 4970, Tax on AccumulationDistribution of Trusts, as you may not beaware that the beneficiary may be abeneficiary of other trusts with othertrustees.

For examples of accumulationdistributions that include payments fromone trust to another trust, and amountsdistributed for a dependent's support, seeRegulations section 1.665(b)-1A(b).

Part II—Ordinary IncomeAccumulation Distribution

Line 6—Distributable Net Income forEarlier YearsEnter the applicable amounts as follows:

For information about throwback years,see the instructions for line 13. Forpurposes of line 6, in figuring the DNI ofthe trust for a throwback year, subtractany estate tax deduction for income inrespect of a decedent if the income isincludible in figuring the DNI of the trustfor that year.

Line 7—Distributions Made DuringEarlier YearsEnter the applicable amounts as follows:

Line 11—Prior AccumulationDistribution Thrown Back to anyThrowback YearEnter the amount of prior accumulationdistributions thrown back to the throwbackyears. Do not enter distributions excludedunder section 663(a)(1) for gifts,bequests, etc.

Line 13—Throwback YearsAllocate the amount on line 5 that is anaccumulation distribution to the earliestapplicable year first, but do not allocatemore than the amount on line 12 for any

throwback year. An accumulationdistribution is thrown back first to theearliest preceding tax year in which thereis undistributed net income (UNI). Then,it is thrown back beginning with the nextearliest year to any remaining precedingtax years of the trust. The portion of theaccumulation distribution allocated to theearliest preceding tax year is the amountof the UNI for that year. The portion of theaccumulation distribution allocated to anyremaining preceding tax year is theamount by which the accumulationdistribution is larger than the total of theUNI for all earlier preceding tax years.

A tax year of a trust during which thetrust was a simple trust for the entire yearis not a preceding tax year unless (a)during that year the trust received outsideincome or (b) the trustee did not distributeall of the trust's income that was requiredto be distributed currently for that year. Inthis case, UNI for that year must not bemore than the greater of the outsideincome or income not distributed duringthat year.

The term “outside income” meansamounts that are included in the DNI ofthe trust for that year but that are not“income” of the trust as defined inRegulations section 1.643(b)-1. Someexamples of outside income are: (a)income taxable to the trust under section691; (b) unrealized accounts receivablethat were assigned to the trust; and (c)distributions from another trust thatinclude the DNI or UNI of the other trust.Enter the applicable year at the top ofeach column for each throwback year.

Line 16—Tax-Exempt Interest Includedon Line 13For each throwback year, divide line 15by line 6 and multiply the result by thefollowing:

Part III—Taxes Imposed onUndistributed Net IncomeFor the regular tax computation, if thereis a capital gain, complete lines 18through 25 for each throwback year. If thetrustee elected the alternative tax oncapital gains, complete lines 26 through31 instead of lines 18 through 25 for eachapplicable year. If there is no capital gainfor any year, or there is a capital loss forevery year, enter on line 9 the amount ofthe tax for each year identified in theinstruction for line 18 and do not completePart III. If the trust received anaccumulation distribution from anothertrust, see Regulations section1.665(b)-1A.Note: The alternative tax on capital gainswas repealed for tax years beginning afterDecember 31, 1978. The maximum rateon net capital gain for 1981, 1987, and1991 through 1998 is not an alternativetax for this purpose.

Throwback year(s) Amount from line

1969–1977 .............. Schedule C, Form 1041, line 51978–1979 .............. Form 1041, line 611980 ........................ Form 1041, line 601981–1982 .............. Form 1041, line 581983–1996 .............. Schedule B, Form 1041, line 91997–1998 .............. Schedule B, Form 1041, line 7

Throwback year(s) Amount from line

1969–1977 ........... Schedule C, Form 1041, line 2(a)1978–1979 ........... Form 1041, line 58(a)1980 ..................... Form 1041, line 57(a)1981–1982 ........... Form 1041, line 55(a)1983–1998 ........... Schedule B, Form 1041, line 2

Throwback year(s) Amount from line

1969–1977 .............. Schedule C, Form 1041, line 81978 ........................ Form 1041, line 641979 ........................ Form 1041, line 651980 ........................ Form 1041, line 641981–1982 .............. Form 1041, line 621983–1996 .............. Schedule B, Form 1041, line 131997–1998 .............. Schedule B, Form 1041, line 11

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Line 18—Regular TaxEnter the applicable amounts as follows:

Line 19—Trust's Share of NetShort-Term GainFor each throwback year, enter thesmaller of the capital gain from the twolines indicated. If there is a capital lossor a zero on either or both of the two linesindicated, enter zero on line 19.

Line 20—Trust's Share of NetLong-Term GainEnter the applicable amounts as follows:

Line 22—Taxable IncomeEnter the applicable amounts as follows:

Line 26—Tax on Income Other ThanLong-Term Capital GainEnter the applicable amounts as follows:

Line 27—Trust's Share of NetShort-Term GainIf there is a loss on any of the followinglines, enter zero on line 27 for theapplicable throwback year. Otherwise,enter the applicable amounts as follows:

Line 28—Trust's Share of TaxableIncome Less Section 1202 DeductionEnter the applicable amounts as follows:

Part IV—Allocation to BeneficiaryComplete Part IV for each beneficiary. Ifthe accumulation distribution is allocatedto more than one beneficiary, attach anadditional copy of Schedule J with Part IVcompleted for each additional beneficiary.Give each beneficiary a copy of his or herrespective Part IV information. If morethan 5 throwback years are involved, useanother Schedule J, completing Parts IIand III for each additional throwback year.

If the beneficiary is a nonresident alienindividual or a foreign corporation, seesection 667(e) about retaining thecharacter of the amounts distributed todetermine the amount of the U.S.withholding tax.

The beneficiary uses Form 4970 tofigure the tax on the distribution. Thebeneficiary also uses Form 4970 for thesection 667(b)(6) tax adjustment if anaccumulation distribution is subject toestate or generation-skipping transfer tax.This is because the trustee may not bethe estate or generation-skipping transfertax return filer.

Schedule K-1 (Form 1041)—Beneficiary's Share ofIncome, Deductions, Credits,etc.

General InstructionsUse Schedule K-1 (Form 1041) to reportthe beneficiary's share of income,deductions, and credits from a trust or adecedent's estate.

Who Must FileThe fiduciary (or one of the jointfiduciaries) must file Schedule K-1. A copyof each beneficiary's Schedule K-1 is

attached to the Form 1041 filed with theIRS and each beneficiary is given a copyof his or her respective Schedule K-1.One copy of each Schedule K-1 must beretained for the fiduciary's records.

Beneficiary's Identifying NumberAs a payer of income, you are requiredunder section 6109 to request and providea proper identifying number for eachrecipient of income. Enter thebeneficiary's number on the respectiveSchedule K-1 when you file Form 1041.Individuals and business recipients areresponsible for giving you their TIN uponrequest. You may use Form W-9,Request for Taxpayer IdentificationNumber and Certification, to request thebeneficiary's identifying number.Penalty. Under section 6723, the payeris charged a $50 penalty for each failureto provide a required TIN, unlessreasonable cause is established for notproviding it. Explain any reasonablecause in a signed affidavit and attach it tothis return.

Tax Shelter's Identification NumberIf the estate or trust is a tax shelter, isinvolved in a tax shelter, or is consideredto be the organizer of a tax shelter, thereare reporting requirements under section6111 for both the fiduciaries and thebeneficiaries.

See Form 8264, Application forRegistration of a Tax Shelter, and Form8271, Investor Reporting of Tax ShelterRegistration Number, and their relatedinstructions for information regarding thefiduciary's reporting requirements.

Substitute FormsYou do not need prior IRS approval for asubstitute Schedule K-1 (Form 1041) thatfollows the specifications for filingsubstitute Schedules K-1 in Pub. 1167,Substitute Printed, Computer-Prepared,and Computer-Generated Tax Forms andSchedules, or is an exact copy of an IRSSchedule K-1. You must request IRSapproval to use other substituteSchedules K-1. To request approval, writeto: Internal Revenue Service, Attention:Substitute Forms Program Coordinator,OP:FS:FP:F:CD, 1111 ConstitutionAvenue, NW, Washington, DC 20224.

Inclusion of Amounts in Beneficiaries'IncomeSimple trust. The beneficiary of a simpletrust must include in his or her grossincome the amount of the income requiredto be distributed currently, whether or notdistributed, or if the income required to bedistributed currently to all beneficiariesexceeds the distributable net income(DNI), his or her proportionate share ofthe DNI. The determination of whethertrust income is required to be distributedcurrently depends on the terms of thetrust instrument and applicable local law.See Regulations section 1.652(c)-4 for acomprehensive example.

Throwback year(s) Amount from lineThrowback year(s) Amount from line1969–1976 ............. Form 1041, page 1, line 24

1977 ....................... Form 1041, page 1, line 26 1969 ......................................... Schedule D, line 201978–1979 ............. Form 1041, line 27 1970 ......................................... Schedule D, line 191980–1984 ............. Form 1041, line 26c 1971 ......................................... Schedule D, line 501985–1986 ............. Form 1041, line 25c 1972–1975 ............................... Schedule D, line 481987 ....................... Form 1041, line 22c 1976–1978 ............................... Schedule D, line 271988–1998 ............. Schedule G, Form 1041, line 1a

Throwback year(s) Amount from line

1969–1970 ............. Schedule D, line 10, column 21971–1978 ............. Schedule D, line 14, column 2Throwback year(s) Amount from line

1969–1970 ........ Schedule D, line 10, column 2, orSchedule D, line 12, column 2

1971–1978 ........ Schedule D, line 14, column 2, orSchedule D, line 16, column 2

1979 .................. Schedule D, line 18, column (b), or Throwback year(s) Amount from lineSchedule D, line 20, column (b)

1969 ......................................... Schedule D, line 191970 ......................................... Schedule D, line 181980–1981 ........ Schedule D, line 14, column (b), or1971 ......................................... Schedule D, line 38Schedule D, line 16, column (b)1972–1975 ............................... Schedule D, line 39

1982 .................. Schedule D, line 16, column (b), or 1976–1978 ............................... Schedule D, line 21Schedule D, line 18, column (b)

1983–1996 ........ Schedule D, line 15, column (b), orSchedule D, line 17, column (b)

1997–1998 ........ Schedule D, line 14, column (2), orSchedule D, line 16, column (2)

Throwback year(s) Amount from line

1969–1970 ............... 50% of Schedule D, line 13(e)

1971–1977 ............... 50% of Schedule D, line 17(e)

Schedule D, line 17(e), or line1978 ......................... 31, whichever is applicable,

less Form 1041, line 23

Schedule D, line 25 or line 27,1979 ......................... whichever is applicable, less

Form 1041, line 23

1980–1981 ............... Schedule D, line 21, lessSchedule D, line 22

1982 ......................... Schedule D, line 23, lessSchedule D, line 24

1983–1986 ............... Schedule D, line 22, lessSchedule D, line 23

Schedule D, the smaller1987–1996 ............... of any gain on line 16 or

line 17, column (b)

Schedule D, the smaller1997–1998 ............... of any gain on line 15c or

line 16, column (2)

Throwback year(s) Amount from line

1969–1976 ..................... Form 1041, page 1, line 231977 ............................... Form 1041, page 1, line 251978–1979 ..................... Form 1041, line 261980–1984 ..................... Form 1041, line 251985–1986 ..................... Form 1041, line 241987 ............................... Form 1041, line 211988–1996 ..................... Form 1041, line 221997 ............................... Form 1041, line 231998 ............................... Form 1041, line 22

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Estates and complex trusts. Thebeneficiary of a decedent's estate orcomplex trust must include in his or hergross income the sum of:

1. The amount of the income requiredto be distributed currently, or if the incomerequired to be distributed currently to allbeneficiaries exceeds the DNI (figuredwithout taking into account the charitablededuction), his or her proportionate shareof the DNI (as so figured) and

2. All other amounts properly paid,credited, or required to be distributed, orif the sum of the income required to bedistributed currently and other amountsproperly paid, credited, or required to bedistributed to all beneficiaries exceeds theDNI, his or her proportionate share of theexcess of DNI over the income requiredto be distributed currently.

See Regulations section 1.662(c)-4 fora comprehensive example.

For complex trusts that have more thanone beneficiary, and if differentbeneficiaries have substantially separateand independent shares, their shares aretreated as separate trusts for the solepurpose of determining the amount of DNIallocable to the respective beneficiaries.For the estates of decedents dying afterAugust 5, 1997, a similar rule applies totreat substantially separate andindependent shares of differentbeneficiaries of an estate as separateestates. For examples of the applicationof the separate share rule, see theregulations under section 663(c).Character of income. The beneficiary'sincome is considered to have the sameproportion of each class of items enteringinto the computation of DNI that the totalof each class has to the DNI (e.g., halfdividends and half interest if the incomeof the estate or trust is half dividends andhalf interest).Allocation of deductions. Generally,items of deduction that enter into thecomputation of DNI are allocated amongthe items of income to the extent suchallocation is not inconsistent with the rulesset out in section 469 and its regulations,relating to passive activity loss limitations,in the following order.

First, all deductions directly attributableto a specific class of income are deductedfrom that income. For example, rentalexpenses, to the extent allowable, arededucted from rental income.

Second, deductions that are not directlyattributable to a specific class of incomegenerally may be allocated to any classof income, as long as a reasonableportion is allocated to any tax-exemptincome. Deductions considered notdirectly attributable to a specific class ofincome under this rule include fiduciaryfees, safe deposit box rental charges, andstate income and personal property taxes.The charitable deduction, however, mustbe ratably apportioned among each classof income included in DNI.

Finally, any excess deductions that aredirectly attributable to a class of incomemay be allocated to another class ofincome. However, in no case can excess

deductions from a passive activity beallocated to income from a nonpassiveactivity, or to portfolio income earned bythe estate or trust. Excess deductionsattributable to tax-exempt income cannotoffset any other class of income.

In no case can deductions be allocatedto an item of income that is not includedin the computation of DNI, or attributableto corpus.

Except for the final year, and fordepreciation or depletion allocations inexcess of income (see Rev. Rul. 74-530,1974-2 C.B. 188), you may not show anynegative amounts for any class of income,because the beneficiary generally maynot claim losses or deductions from theestate or trust.Gifts and bequests. Do not include inthe beneficiary's income any gifts orbequests of a specific sum of money orof specific property under the terms of thegoverning instrument that are paid orcredited in three installments or less.

Amounts that can be paid or creditedonly from income of the estate or trust donot qualify as a gift or bequest of aspecific sum of money.Past years. Do not include in thebeneficiary's income any amountsdeducted on Form 1041 for an earlier yearthat were credited or required to bedistributed in that earlier year.

Beneficiary's Tax YearThe beneficiary's income from the estateor trust must be included in thebeneficiary's tax year during which the taxyear of the estate or trust ends. See Pub.559 for more information, including theeffect of the death of a beneficiary duringthe tax year of the estate or trust.

Specific Instructions

Line 1—InterestEnter the beneficiary's share of thetaxable interest income minus allocabledeductions.

Line 2—Ordinary DividendsEnter the beneficiary's share of ordinarydividends minus allocable deductions.

Line 3—Net Short-Term Capital GainEnter the beneficiary's share of the netshort-term capital gain from line 14,column (1), Schedule D (Form 1041),minus allocable deductions. Do not entera loss on line 3. If, for the final year of theestate or trust, there is a capital losscarryover, enter on line 13b thebeneficiary's share of short-term capitalloss carryover. However, if the beneficiaryis a corporation, enter on line 13b thebeneficiary's share of all short- andlong-term capital loss carryovers as asingle item. See section 642(h) andrelated regulations for more information.

Lines 4a through 4c—Net Long-TermCapital GainEnter the beneficiary's share of the netlong-term capital gain from lines 15athrough 15c, column (1), Schedule D(Form 1041), minus allocable deductions.

Do not enter a loss on lines 4a through4c. If, for the final year of the estate ortrust, there is a capital loss carryover,enter on line 13c the beneficiary's shareof the long-term capital loss carryover. (Ifthe beneficiary is a corporation, see theinstructions for line 3.) See section 642(h)and related regulations for moreinformation.

Gains or losses from the complete orpartial disposition of a rental, rental realestate, or trade or business activity that isa passive activity, must be shown on anattachment to Schedule K-1.

Line 5a—Annuities, Royalties, andOther Nonpassive IncomeEnter the beneficiary's share of annuities,royalties, or any other income, minusallocable deductions (other than directlyapportionable deductions), that is NOTsubject to any passive activity losslimitation rules at the beneficiary level.Use line 6a to report income items subjectto the passive activity rules at thebeneficiary's level.

Lines 5b and 6b—DepreciationEnter the beneficiary's share of thedepreciation deductions attributable toeach activity reported on lines 5a and 6a.See the instructions on page 11 for adiscussion of how the depreciationdeduction is apportioned between thebeneficiaries and the estate or trust.Report any AMT adjustment or taxpreference item attributable todepreciation separately on line 12a.Note: An estate or trust cannot make anelection under section 179 to expensecertain tangible property.

Lines 5c and 6c—DepletionEnter the beneficiary's share of thedepletion deduction under section 611attributable to each activity reported onlines 5a and 6a. See the instructions onpage 11 for a discussion of how thedepletion deduction is apportionedbetween the beneficiaries and the estateor trust. Report any tax preference itemattributable to depletion separately on line12b.

Lines 5d and 6d—AmortizationItemize the beneficiary's share of theamortization deductions attributable toeach activity reported on lines 5a and 6a.Apportion the amortization deductionsbetween the estate or trust and thebeneficiaries in the same way that thedepreciation and depletion deductions aredivided. Report any AMT adjustmentattributable to amortization separately online 12c.

Line 6a—Trade or Business, RentalReal Estate, and Other Rental IncomeEnter the beneficiary's share of trade orbusiness, rental real estate, and otherrental income, minus allocable deductions(other than directly apportionabledeductions). To assist the beneficiary infiguring any applicable passive activityloss limitations, also attach a separateschedule showing the beneficiary's share

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of income derived from each trade orbusiness, rental real estate, and otherrental activity.

Lines 6b Through 6d

CAUTION!

The limitations on passive activitylosses and credits under section469 apply to estates and trusts.

Estates and trusts that distribute incometo beneficiaries are allowed to apportiondepreciation, depletion, and amortizationdeductions to the beneficiaries. Thesedeductions are referred to as “directlyapportionable deductions.”

Rules for treating a beneficiary'sincome and directly apportionabledeductions from an estate or trust andother rules for applying the passive lossand credit limitations to beneficiaries ofestates and trusts have not yet beenissued.

Any directly apportionable deduction,such as depreciation, is treated by thebeneficiary as having been incurred in thesame activity as incurred by the estate ortrust. However, the character of suchdeduction may be determined as if thebeneficiary incurred the deductiondirectly.

To assist the beneficiary in figuring anyapplicable passive activity loss limitations,also attach a separate schedule showingthe beneficiary's share of directlyapportionable deductions derived fromeach trade or business, rental real estate,and other rental activity.

Line 7—Income for Minimum TaxPurposesEnter the beneficiary's share of theincome distribution deduction figured ona minimum tax basis from line 27 ofSchedule I.

Line 8—Income for Regular TaxPurposesEnter the beneficiary's share of theincome distribution deduction figured online 15 of Schedule B. This amount shouldequal the sum of lines 1 through 3, 4c, 5a,and 6a.

Line 10—Estate Tax Deduction(Including Certain Generation-SkippingTransfer Taxes)If the distribution deduction consists ofany income in respect of a decedent, andthe estate or trust was allowed adeduction under section 691(c) for theestate tax paid attributable to such income(see the line 19 instructions on page 14),then the beneficiary is allowed an estatetax deduction in proportion to his or hershare of the distribution that consists ofsuch income. For an example of thecomputation, see Regulations section1.691(c)-2. Figure the computation on aseparate sheet and attach it to the return.

Line 11—Foreign TaxesList on a separate sheet the beneficiary'sshare of the applicable foreign taxes paidor accrued and the various foreign sourcefigures needed to figure the beneficiary'sforeign tax credit. See Pub. 514 andsection 901(b)(5) for special rules aboutforeign taxes.

Lines 12a through 12cEnter any adjustments or tax preferenceitems attributable to depreciation,depletion, or amortization that wereallocated to the beneficiary. For propertyplaced in service before 1987, reportseparately the accelerated depreciationof real and leased personal property.

Line 12d—Exclusion ItemsEnter the beneficiary's share of theadjustment for minimum tax purposesfrom Schedule K-1, line 9, that isattributable to exclusion items (ScheduleI, lines 4a through 4d, 4p, and 4q).

Line 13a—Excess Deductions onTerminationIf this is the final return of the estate ortrust, and there are excess deductions ontermination (see the instructions for line22 on page 14), enter the beneficiary'sshare of the excess deductions on line13a. Figure the deductions on a separatesheet and attach it to the return.

Excess deductions on terminationoccur only during the last tax year of thetrust or decedent's estate when the totaldeductions (excluding the charitablededuction and exemption) are greaterthan the gross income during that taxyear.

Generally, a deduction based on anNOL carryover is not available to abeneficiary as an excess deduction.However, if the last tax year of the estateor trust is also the last year in which anNOL carryover may be taken (see section172(b)), the NOL carryover is consideredan excess deduction on the terminationof the estate or trust to the extent it is notabsorbed by the estate or trust during itsfinal tax year. For more information, seeRegulations section 1.642(h)-4 for adiscussion of the allocation of thecarryover among the beneficiaries.

Only the beneficiary of an estate ortrust that succeeds to its property isallowed to deduct that entity's excessdeductions on termination. A beneficiarywho does not have enough income in thatyear to absorb the entire deduction maynot carry the balance over to anysucceeding year. An individual beneficiarymust be able to itemize deductions inorder to claim the excess deductions indetermining taxable income.

Lines 13b and 13c—Unused CapitalLoss CarryoverUpon termination of the trust ordecedent's estate, the beneficiarysucceeding to the property is allowed asa deduction any unused capital losscarryover under section 1212. If the estateor trust incurs capital losses in the finalyear, use the Capital Loss CarryoverWorksheet on page 28 to figure theamount of capital loss carryover to beallocated to the beneficiary.

Lines 13d and 13e—Net OperatingLoss (NOL) CarryoverUpon termination of a trust or decedent'sestate, a beneficiary succeeding to itsproperty is allowed to deduct any unusedNOL (and any AMT NOL) carryover forregular and AMT purposes if the carryoverwould be allowable to the estate or trustin a later tax year but for the termination.Enter on lines 13d and 13e the unusedcarryover amounts.

Line 14—OtherItemize on line 14, or on a separate sheetif more space is needed, the beneficiary'stax information not entered elsewhere onSchedule K-1. This includes the allocableshare, if any, of:● Payment of estimated tax to be creditedto the beneficiary (section 643(g));● Tax-exempt interest income receivedor accrued by the trust (includingexempt-interest dividends from a mutualfund or other regulated investmentcompany);● Investment income (section 163(d));● Gross farming and fishing income;● Credit for backup withholding (section3406);● The information a beneficiary will needto figure any investment credit;● The work opportunity credit;● The welfare-to-work credit;● The alcohol fuel credit;● The credit for increasing researchactivities;● The low-income housing credit;● The renewable electricity productioncredit;● The empowerment zone employmentcredit;● The Indian employment credit;● The orphan drug credit; and● The information a beneficiary will needto figure any recapture taxes.Note: Upon termination of an estate ortrust, any suspended passive activitylosses (PALs) relating to an interest in apassive activity cannot be allocated to thebeneficiary. Instead, the basis in suchactivity is increased by the amount of anyPALs allocable to the interest, and nolosses are allowed as a deduction on theestate's or trust's final Form 1041.

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