Who must file Form 1041-A?

• Author: Watson, Mark T.

A common misconception is that only trusts described in Sec. 4947 (a) (2) (i.e., "split-interest" trusts) must file Form 1041A. However, trusts claiming a charitable income tax deduction under Sec. 642(c) must also file Form 1041-A. Due to the applicable penalties, failure to file Form 1041-A can have serious consequences.

Statutory Filing Requirement

Sec. 6034, titled "Returns by Trusts Described in Sec. 4947(a) (2) or Claiming Charitable Deductions Under Sec. 642(c)," and Regs. Sec. 1.6034-1 (a) provide that the following trusts (with two exceptions) must file Form 1041-A:

[] Every split-interest trust described in Sec. 4947(a) (2) (unless all transfers to the trust occurred before May 27, 1969); and

[] Any trust claiming a charitable deduction under Sec. 642 (c).

As a result, the following trusts are required to file Form 1041-A annually:

[] Charitable remainder trusts.

[] Pooled income funds.

[] All other Sec. 4947(a)(2) trusts treated as private foundations.

[] Any trust (e.g., a complex trust) that claims a charitable income tax deduction under Sec. 642(c) for the tax year.

Exceptions to Filing Requirement

A trust is not required to file Form 1041-A for any tax year in which the trustee is required (by the terms of the governing instrument and applicable local law) to distribute currently all of the income of the trust. For this purpose, trust income is determined under Sec. 643(b) and Regs. Secs. 1.643(b)-1 and-2 (Regs. Sec. 1.6034-1 (b) (1)).

Observation: This exception should apply to a "net income only" charitable remainder unitrust and a "net income only with make-up provision" charitable remainder unitrust (see Sec. 664(d) (3)) when such trusts' income for the tax year is less than the specified unitrust percentage. Similarly, a complex trust required to distribute all of its income annually (but allowed to make contributions of trust corpus to charitable organizations) should not have to file Form 1041-A.

For tax years beginning after Dec. 31, 1980, a trust described in Sec. 4947(a) (1) (i.e., a trust not exempt from taxation under Sec. 501 (a) and all of the unexpired interests in which are devoted to one or more charitable purposes) also is not required to file Form 1041-A (Sec. 6034(b) and Regs. (2)).

Penalties for Failure to File

A trust required to file Form 1041-A may be assessed a $10 penalty for each day it fails to file the return, up to a maximum penalty for any one return of $5,000 (i.e., 500 days of failing to file)...