Interest and Penalties

Interest.   Interest is charged on taxes paid late even if an extension of time to file is granted. Interest is also charged on penalties imposed for failure to file, negligence, fraud, gross valuation overstatements, and substantial understatements of tax from the due date (including extensions) to the date of payment. The interest charge is figured at a rate determined under section 6621.

Penalty for late filing of return.   A corporation that does not file its tax return by the due date, including extensions, may be penalized 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. The minimum penalty for a return that is over 60 days late is the smaller of the tax due or $100. The penalty will not be imposed if the corporation can show that the failure to file on time was due to reasonable cause. Corporations that file late must attach a statement explaining the reasonable cause.

Penalty for late payment of tax.   A corporation that does not pay the tax when due generally may have to pay a penalty of ½ of 1% of the unpaid tax for each month or part of a month the tax is not paid, up to a maximum of 25% of the unpaid tax. The penalty will not be imposed if the corporation can show that the failure to pay on time was due to reasonable cause.

Trust fund recovery penalty.   This penalty may apply if certain excise, income, social security, and Medicare taxes that must be collected or withheld are not collected or withheld, or these taxes are not paid to the IRS. These taxes are generally reported on Form 720, 941, 943, or 945, (see Other Forms, Returns, and Statements That May Be Required on page 2). The trust fund recovery penalty may be imposed on all persons determined by the IRS to have been responsible for collecting, accounting for, and paying over these taxes, and who acted willfully in not doing so. The penalty is equal to the unpaid trust fund tax. See the instructions for Form 720 or Pub. 15 (Circular E), Employer's Tax Guide, for details, including the definition of responsible persons.

Other penalties.   Other penalties can be imposed for negligence, substantial understatement of tax, and fraud. See sections 6662 and 6663.

Specific Instructions

Period Covered

File the 2002 return for calendar year 2002.

Address

Include the suite, room, or other unit number after the street address.

If the post office does not deliver mail to the street address and the corporation has a P.O. box, show the box number instead.

Employer Identification Number (EIN)

Enter the corporation's EIN. If the corporation does not have an EIN, it must apply for one on Form SS-4, Application for Employer Identification Number. If the corporation has not received its EIN by the time the return is due, write Applied for in the space provided for the EIN. See Pub. 583 for details.

Item A. Section 953 Election

Check the applicable box if the corporation is a foreign corporation and elects under:

1. Section 953(c)(3)(C) to treat its related person insurance income as effectively connected with the conduct of a trade or business in the United States or
2. Section 953(d) to be treated as a domestic corporation.

Generally, a foreign corporation making either election must file its return with the Internal Revenue Service Center, Philadelphia, PA 19255. See Notice 87-50, 1987-2 C.B. 357, and Notice 89-79, 1989-2 C.B. 392, for the procedural rules election statement formats, and filing addresses for making the respective elections under section 953(c)(3)(C) or section 953(d).

Note.   Once either election is made, it will apply to the tax year for which made and all subsequent tax years unless revoked with the consent of the IRS. Also, any loss of a foreign corporation electing to be treated as a domestic insurance company under section 953(d) will be treated as a dual-consolidated loss and may not be used to reduce the taxable income of any other member of the affiliated group for this tax year or any other tax year.

Item E. Final Return, Name Change, Address Change, or Amended Return

Indicate a final return, name change, address change, or amended return by checking the appropriate box.

Note.   If a change of address occurs after the return is filed, use Form 8822, Change of Address, to notify the IRS of the new address.

Taxable Income

Line 1, Taxable income, and line 2, Taxable investment income.   If the corporation is a small company as defined in section 831(b)(2) and elects under section 831(b)(2)(A)(ii) to be taxed on taxable investment income, complete Schedule B (ignore Schedule A) and enter the amount from Schedule B, line 21, on line 2, page 1. All other corporations should complete Schedule A (ignore Schedule B) and enter on line 1, page 1, the amount from Schedule A, line 37.

Tax Computation and Payments

Tax Computation Worksheet for Members of a Controlled Group (keep for your records.)

Note. Each member of a controlled group must compute its tax using this worksheet.
1.	Enter taxable income (line 1 or line 2, page 1)
2.	Enter line 1 or the corporation's share of the $50,000 taxable income bracket, whichever is less
3.	Subtract line 2 from line 1
4.	Enter line 3 or the corporation's share of the $25,000 taxable income bracket, whichever is less
5.	Subtract line 4 from line 3
6.	Enter line 5 or the corporation's share of the $9,925,000 taxable income bracket, whichever is less
7.	Subtract line 6 from line 5
8.	Multiply line 2 by 15%
9.	Multiply line 4 by 25%
10.	Multiply line 6 by 34%
11.	Multiply line 7 by 35%
12.	If the taxable income of the controlled group exceeds $100,000, enter this member's share of the smaller of: 5% of the taxable income in excess of $100,000, or $11,750. See the instructions for line 3b.
13.	If the taxable income of the controlled group exceeds $15 million, enter this member's share of the smaller of: 3% of the taxable income in excess of $15 million, or $100,000. See the instructions for line 3b.
14.	Total. Add lines 8 through 13. Enter here and on line 4, page 1

Line 3

Members of a controlled group.   A member of a controlled group, as defined in section 1563, must check the box on line 3 and complete lines 3a and 3b on page 1.

Line 3a.   Members of a controlled group are entitled to one $50,000, one $25,000, and one $9,925,000 taxable income bracket amount (in that order) on line 3a.

When a controlled group adopts or later amends an apportionment plan, each member must attach to its tax return a copy of its consent to this plan. The copy (or an attached statement) must show the part of the amount in each taxable income bracket apportioned to that member. See Regulations section 1.1561-3(b) for other requirements and for the time and manner of making the consent.

Unequal apportionment plan.   Members of a controlled group may elect an unequal apportionment plan and divide the taxable income brackets as they want. There is no need for consistency among taxable income brackets. Any member may be entitled to all, some, or none of the taxable income bracket. However, the total amount for all members cannot be more than the total amount in each taxable income bracket.

Equal apportionment plan.   If no apportionment plan is adopted, members of a controlled group must divide the amount in each taxable income bracket equally among themselves. For example, controlled group AB consists of Corporation A and Corporation B. They do not elect an apportionment plan. Therefore, each corporation is entitled to:

• $25,000 (one-half of $50,000) on line 3a(1),
• $12,500 (one-half of $25,000) on line 3a(2), and
• $4,962,500 (one-half of $9,925,000) on line 3a(3).

Line 3b.   Members of a controlled group are treated as one group to figure the applicability of the additional 5% tax and the additional 3% tax. If an additional tax applies, each member will pay that tax based on the part of the amount used in each taxable income bracket to reduce that member's tax. See section 1561(a). If an additional tax applies, attach a schedule showing the taxable income of the entire group and how the corporation figured its share of the additional tax.

Line 3b(1).   Enter the corporation's share of the additional 5% tax on line 3b(1).

Line 3b(2).   Enter the corporation's share of the additional 3% tax on line 3b(2).

Line 4

Most corporations figure their tax by using the Tax Rate Schedule below. Exceptions apply to members of a controlled group (see worksheet above). Members of a controlled group must attach a statement showing the computation of the tax entered on line 4.

Tax Rate Schedule If the amount on line 1 or line 2, Form 1120-PC, page 1 is:

Over -	But not over -	Tax is:	Of the amount over -
$0	$50,000	15%	$0
50,000	75,000	$ 7,500 + 25%	50,000
75,000	100,000	13,750 + 34%	75,000
100,000	335,000	22,250 + 39%	100,000
335,000	10,000,000	113,900 + 34%	335,000
10,000,000	15,000,000	3,400,000 + 35%	10,000,000
15,000,000	18,333,333	5,150,000 + 38%	15,000,000
18,333,333	- - - - -	35%	0

Deferred tax under section 1291.   If the corporation was a shareholder in a passive foreign investment company (PFIC), and the corporation received an excess distribution or disposed of its investment in the PFIC during the year, it must include the total increase in taxes due under section 1291(c)(2) in the amount entered on line 4. On the dotted line next to line 4, write Section 1291 and the amount.

Do not include on line 4 any interest due under section 1291(c)(3). Instead, show the amount of interest owed in the bottom margin of page 1 and write Section 1291 interest. For details, see Form 8621, Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund.

Additional tax under section 197(f).   A corporation that elects to pay tax on the gain from the sale of an intangible under the related person exception to the anti-churning rules should include any additional tax due under section 197(f)(9)(B) in the total for line 4. On the dotted line next to line 4, write Section 197 and the amount. For more information, see Pub. 535, Business Expenses.

Line 5. Enter amount of tax that a reciprocal must include.   A mutual insurance company which is an interinsurer or reciprocal underwriter may elect, under section 835, to limit the deduction for amounts paid or incurred to a qualifying attorney-in-fact to the amount of the deductions of the attorney-in-fact allocable to the income received by the attorney-in-fact from the reciprocal. If this election is made, any increase in taxable income of a reciprocal as a result of this limitation is taxed at the highest rate of tax specified in section 11(b).

Make no entry on line 5 if the mutual insurance company's taxable income before including the section 835(b) amount is $100,000 or more. Otherwise, this tax is 35% of the section 835(b) amount. If an entry is made on line 5, attach a statement showing how the tax was computed.

Reciprocal underwriters making the section 835(a) election are allowed a credit on line 14h for the amount of tax paid by the attorney-in-fact that is related to the income received by the attorney-in-fact from the reciprocal in the tax year.

See section 835 and the related regulations for special rules and information regarding the statements required to be attached to the return.

Line 6. Alternative minimum tax (AMT).   Unless the corporation is treated as a small corporation exempt from the AMT, it may owe the AMT if it has any of the adjustments and tax preference items listed on Form 4626. The corporation must file Form 4626 if its taxable income (or loss) before the NOL deduction, combined with these adjustments and tax preference items, is more than the smaller of $40,000 or the corporation's allowable exemption amount (from Form 4626).

For this purpose, taxable income does not include the NOL deduction. See Form 4626 for details.

Exemption for small corporation. A corporation is treated as a small corporation exempt from the AMT for its tax year beginning in 2002 if that year is the corporation's first tax year in existence (regardless of its gross receipts) or:

1. It was treated as a small corporation exempt from the AMT for all prior tax years beginning after 1997 and
2. Its average annual gross receipts for the 3-tax-year-period (or portion thereof during which the corporation was in existence) ending before its tax year beginning in 2002 did not exceed $7.5 million ($5 million if the corporation had only 1 prior tax year).

Line 8a. Foreign tax credit.   To find out when a corporation can take this credit for payment of income tax to a foreign country or U.S. possession, see Form 1118, Foreign Tax Credit - Corporations.

Line 8b. Other Credits

Include any other credits on line 8b. On the dotted line to the left of the entry space, write the amount of the credit and identify it.

Possessions tax credit.   The Small Business Job Protection Act of 1996 repealed the possessions credit. However, existing credit claimants may qualify for a credit under the transitional rules. See Form 5735, Possessions Tax Credit (Under Sections 936 and 30A).

Nonconventional source fuel credit.   A credit is allowed for the sale of qualified fuels produced from a nonconventional source. Section 29 contains a definition of qualified fuels, provisions for figuring the credit, and other special rules. Attach a separate schedule to the return showing the computation of the credit.

Qualified electric vehicle (QEV) credit.   Include on line 8b any credit from Form 8834, Qualified Electric Vehicle Credit. Vehicles that qualify for this credit are not eligible for the deduction for clean-fuel vehicles under section 179A.

Line 8c. General Business Credit

Enter on line 8c the corporation's total general business credit.

If the corporation is filing Form 8844, Empowerment Zone and Renewal Community Employment Credit, or Form 8884, New York Liberty Zone Business Employee Credit, check the Form(s) box, write the form number in the space provided, and include the allowable credit on line 8c.

If the corporation is required to file Form 3800, General Business Credit, check the Form 3800 box and include the allowable credit on line 8c. If the corporation is not required to file Form 3800, check the Form(s) box, write the form number in the space provided, and include on line 8c the allowable credit from the applicable form listed below.

• Investment Credit (Form 3468).
• Work Opportunity Credit (Form 5884).
• Credit for Alcohol Used as Fuel (Form 6478).
• Credit for Increasing Research Activities (Form 6765).
• Low-Income Housing Credit (Form 8586).
• Orphan Drug Credit (Form 8820).
• Disabled Access Credit (Form 8826).
• Enhanced Oil Recovery Credit (Form 8830).
• Renewable Electricity Production Credit (Form 8835).
• Indian Employment Credit (Form 8845).
• Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips (Form 8846).
• Credit for Contributions to Selected Community Development Corporations (Form 8847).
• Welfare-to-Work Credit (Form 8861).
• New Markets Credit (Form 8874).
• Credit for Small Employer Pension Plan Startup Costs (Form 8881).
• Credit for Employer-Provided Child Care Facilities and Services (Form 8882).

Line 8d. Credit for prior year minimum tax.   To figure the minimum tax credit and any carryforward of that credit, use Form 8827, Credit for Prior Year Minimum Tax - Corporations. Also see Form 8827 if any of the corporation's 2001 nonconventional source fuel credit or qualified electric vehicle credit was disallowed solely because of the tentative minimum tax limitation. See section 53(d).

Line 8e. Qualified zone academy bond credit.   Enter the amount of any credit from Form 8860, Qualified Zone Academy Bond Credit.

Line 10. Foreign corporations.   A foreign corporation carrying on an insurance business in the United States is taxed as a domestic insurance company on its income effectively connected with the conduct of a trade or business in the United States. See sections 842 and 897, and Notice 89-96, 1989-2 C.B. 417, for more information. See Rev. Proc. 2002-58, 2002-40 I.R.B. 644, for the domestic asset/liability percentages and domestic investment yields needed by foreign insurance companies to compute their minimum effectively connected net investment income under section 842(b). Income from sources outside the United States from U.S. business is treated as effectively connected with the conduct of a trade or business in the United States. For a definition of effectively connected income, see sections 864(c) and 897.

Generally, any other U.S.-source income received by a foreign corporation that is not effectively connected with the conduct of a trade or business in the United States is taxed at 30% (or at a lower treaty rate). See section 881. If the corporation has this income, attach a schedule showing the kind and amount of income, the tax rate, and the amount of tax.

Note.   Interest received from certain portfolio debt investments that were issued after July 18, 1984, is not subject to the tax.

Additional taxes resulting from the net investment income adjustment may offset a corporation's 30% tax on U.S.-source income. The tax reduction is determined by multiplying the 30% tax by the ratio of the amount of income adjustment to income subject to the 30% tax, computed without the exclusion for interest on state and local bonds or income exempted from taxation by treaty. See section 842(c)(2). Attach a statement showing how the reduction under section 881 was figured. Enter the net tax imposed by section 881 on line 10.

Note.   Section 953(d) allows a foreign insurance company to elect to be taxed as a domestic corporation. If elected, include the additional tax required to be paid on line 13. Write on the dotted line to the left of line 13 Sec. 953(d) and the amount. Attach a schedule showing the computation. See section 953(d) for more details.

Line 11. Personal holding company tax.   A corporation is taxed as a personal holding company (PHC) under section 542 if:

• At least 60% of it's adjusted ordinary gross income for the tax year is PHC income and
• At any time during the last half of the tax year more than 50% in value of its outstanding stock is owned, directly or indirectly, by five or fewer individuals.

See Schedule PH (Form 1120), U.S. Personal Holding Company Tax, for definitions and details on how to figure the tax.

Line 12. Other Taxes

Include any of the following taxes and interest in the total on line 12. Check the appropriate box(es) for the form, if any, used to compute the total.

Recapture of investment credit.   If the corporation disposed of investment credit property or changed its use before the end of its useful life or recovery period, it may owe a tax. See Form 4255, Recapture of Investment Credit, for details.

Recapture of low-income housing credit.   If the corporation disposed of property (or there was a reduction in the qualified basis of the property) for which it took the low-income housing credit, it may owe a tax. See Form 8611, Recapture of Low-Income Housing Credit.

Other.   Additional taxes and interest amounts may be included in the total entered on line 12. Check the box for Other if the corporation includes any of the taxes and interest discussed below. See How to report below, for details on reporting these amounts on an attached schedule.

• Recapture of qualified electric vehicle (QEV) credit. The corporation must recapture part of the QEV credit claimed in a prior year, if, within 3 years of the date the vehicle was placed in service, it ceases to qualify for the credit. See Regulations section 1.30-1 for details on how to figure the recapture.
• Recapture of Indian employment credit. Generally, if an employer terminates the employment of a qualified employee less than 1 year after the date of initial employment, any Indian employment credit allowed for a prior tax year because of wages paid or incurred to that employee must be recaptured. For details, see Form 8845 and section 45A.
• Recapture of New markets credit (see Form 8874).
• Interest on deferred tax attributable to certain nondealer installment obligations (section 453A(c)).
• Interest due on deferred gain (section 1260(b)).

How to report.   If the corporation checked the Other box, attach a schedule showing the computation of each item included in the total for line 12, and identify the applicable Code section and the type of tax or interest.

Line 13. Total Tax

Include any deferred tax on the termination of a section 1294 election applicable to shareholders in a qualified electing fund in the amount entered on line 13. See Form 8621, Part V, and How to report below.

Subtract any deferred tax on the corporation's share of undistributed earnings of a qualified electing fund (see Form 8621, Part II).

How to report.   Attach a schedule showing the computation of each item included in, or subtracted from, the total for line 13. On the dotted line next to line 13, specify (a) the applicable Code section, (b) the type of tax, and (c) the amount of tax.

Line 14b. Prior year(s) special estimated tax payments to be applied.   The amount entered on line 14b must agree with the amount(s) from Form 8816, Part III, line 11. See Form 8816 and section 847(2) for additional information.

Line 14c. Estimated tax payments.   Enter any estimated tax payments the corporation made for the tax year. Do not include any amount being applied on line 14d.

Line 14d. Special estimated tax payments.   If the deduction under section 847 is claimed on Schedule A, line 27, special estimated tax payments must be made in an amount equal to the tax benefit of the deduction. These payments must be made on or before the due date (without regard to extensions) of this tax return. See Form 8816 and section 847(2) for additional information.

Tax benefit rule.   Section 847(8) requires that if a corporation carries back net operating losses or capital losses that arise in years after a year in which a section 847 deduction was claimed, then the corporation must recompute the tax benefit attributable to the previously claimed section 847 deduction taking into account the loss carrybacks. Tax benefits also include those derived from filing a consolidated return with another insurance company (without regard to section 1503(c)).

Therefore, if the recomputation changes the amount of the section 847 tax benefit, then the taxpayer must provide a computation schedule and attach it to Form 8816.

Line 14h. Credit by reciprocal for tax paid by attorney-in-fact under section 835(d).   Enter the amount of tax paid by an attorney-in-fact as a result of income received by the attorney-in-fact from the reciprocal during the tax year. For more information, see section 835, the related regulations, and the instructions for line 5 on page 7.

Line 14i. Other credits and payments.   Enter the amount of any other credits the corporation may take and/or payments made. Write to the left of the entry space, an explanation of the entry.

Backup withholding.   If the corporation had income tax withheld from any payments it received because, for example, it failed to give the payer its correct EIN, include the amount withheld in the total for line 14i. This type of withholding is called Backup Withholding. Include the amount withheld in the entry space for line14j, and write Backup Withholding on the dotted line to the left of the entry space.

Line 14j. Total payments.   Add the amounts on lines 14f through 14i and enter the total on line 14j.

Line 15. Estimated tax penalty.   A corporation that does not make estimated tax payments when due may be subject to an underpayment penalty for the period of underpayment. Generally, a corporation is subject to the penalty if its tax liability is $500 or more and it did not timely pay the smaller of:

• Its tax liability for 2002 or
• Its prior year's tax.

See section 6655 for details and exceptions, including special rules for large corporations.

Use Form 2220, Underpayment of Estimated Tax by Corporations, to see if the corporation owes a penalty and to figure the amount of the penalty. Generally, the corporation does not have to file this form because the IRS can figure the amount of any penalty and bill the corporation for it. However, even if the corporation does not owe the penalty, complete and attach Form 2220 if:

• The annualized income or adjusted seasonal installment method is used or
• The corporation is a large corporation computing its first required installment based on the prior year's tax. See the Instructions for Form 2220 for the definition of a large corporation.

If you attach Form 2220, be sure to check the box on line 15, and enter the amount of any penalty on that line.

Line 18. Direct deposit of tax refund of $1 million or more.   If the corporation wants its refund of $1 million or more directly deposited into its checking or savings account at any U.S. bank or other financial institution instead of having a check sent to the corporation, complete Form 8302 and attach it to the corporation's tax return.

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