Favorable Tax Court Ruling Upholds Trustees’ Activities as Qualifying Trust for Material Participation Exception Under IRC Section 469 (and the Net Investment Income Tax Under IRC Section 1411)

By: Alison E. Lothes, Esq.Gilmore, Rees & Carlson, P.C.

In Frank Aragona Trust et al. v. Commissioner, 142 T.C. No. 9, the Tax Court ruled in favor of the taxpayer, holding that a trust could and did materially participate in real estate rental activities, qualifying for the exception to the passive activity rules under IRC Section 469.  This case is helpful, as there are currently no regulations and very few rulings on how to apply the “material participation” rules to trusts.  The IRS has been interpreting the exception to be very limited but the Court agreed with the taxpayer that the activities of the trustees, including those in their capacity as employees of an entity owned by the trust, could be considered when determining whether the trust materially participated in the real estate rental business.

A majority of the trust’s business was operated through a wholly owned LLC but the trust also operated some of its real estate business directly and some through other entities.  The trustees were intertwined in the LLC, other entities and the business.  The LLC employed three of the trustees as full time employees (along with other employees, including a controller, maintenance workers, leasing agents and clerks).   Two of the trustees also held minority interests in several of the entities in which the trust was also a member.

Read the full article at the BBA Trust and Estates Blog