Material Participation Rules for Trusts: Leveraging the Aragona Trust Holding to Minimize NIIT Impact

IRC Section 469 disallows passive activity losses for all taxpayers (including trusts) who don’t “materially participate” in the business. Until the passage of IRC 1411 imposing the net investment income tax (NIIT), trustees and advisors were seldom concerned with passive activity loss rules. Now, however, trust income is subject to the 3.8% NIIT, unless the trust “materially participated” in the activity that generated the income.

Having provided little guidance on what constitutes MP with respect to a trust that owns an interest in a trade or business until 2013, the Service was holding firm for very narrow interpretations of existing regulations to situations where businesses are managed by trusts. Then, the U.S. Tax Court issued its ruling in Aragona, a significant taxpayer victory for trusts owning business interests.

However, Aragona left significant questions unanswered regarding trust ownership of real estate assets that can meet the MP rules in all instances. Tax advisers to trusts need to thoroughly understand the post-Aragona MP test to avoid unnecessary NIIT on trust income. The adviser’s proactive planning based on detailed knowledge of Aragona, how it has been applied, and current Service positions will put the trust taxpayer in the best position to claim non-passive activities.

Listen as our experienced panel details the evolution of passive activity loss and MP rules as applied to trusts, and provides best practices for structuring business activities to minimize the impact of the NIIT on trust income activities.

1. IRC 469 passive activity definitions
2. Previous standards
   1. Carter Trust v. United States
   2. TAM 200733023
   3. PLR 201029014
   4. PLR 201317010
3. Aragona standard—employee participation
4. State law fiduciary considerations
5. Remaining questions regarding material participation rules after Aragona

The panel will discuss these and other critical questions:

• What are the evolving standards for determining whether a trust has MP in a trade or business activity?
• What is the current IRS audit position on MP in a trade or business for trusts and fiduciaries?
• What are the NIIT consequences of the passive vs. active classification for trusts?
• What questions were not settled by Aragona regarding MP in trust holdings?

Learning Objectives

Upon completing this webinar, you will be able to:

• Identify how passive activity loss rules apply to trusts.
• Determine the criteria for a taxpayer to have materially participated in the trust.
• Recognize the special rules that apply to real estate activities.
• Establish when net investment income tax impacts the trust.
• Verify when losses may be deducted and whether they may be deducted in full.

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite:

  Three years+ business tax or estate tax experience preparing complex tax forms and schedules, supervising other preparer/accountants. Specific knowledge and understanding of trust, requirements for material participation, passive activity rules, net investment income tax; familiarity with trusts owning business interests and fiduciary considerations under state law.

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IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).