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

Avoiding the Passive Activity Loss Rules for Trusts Through Strategic Planning

Recording of a 110-minute CPE webinar with Q&A

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Conducted on Thursday, November 9, 2017

Recorded event now available

This course will provide tax professionals with a deep dive into the determination of “material participation” (MP) regarding trusts and estates in applying passive activity rules. The panel will analyze the tax court’s groundbreaking holding in Aragona Trust v. Comm'r (2014) and offer perspectives on MP issues that Aragona either did not address or did not provide specific guidance for structuring trust holdings. The panel will outline practical approaches consistent with Aragona and IRS rulings to minimize the impact of the net investment income tax (NIIT) for trusts and estates.

Description

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

The U.S. Tax Court's ruling in Aragona Trust was a significant taxpayer victory for trusts owning business interests, after many years of narrow IRS interpretations of existing regulations to situations where businesses were managed by trusts and little guidance on what constituted material participation.

However, Aragona left unanswered significant questions regarding trust ownership of real estate assets that can meet the MP rules in all instances. Tax advisers to trusts must thoroughly grasp the post-Aragona MP test to avoid unnecessary NIIT on trust income.

The trust taxpayer is in the best position to claim non-passive activities with an adviser’s proactive planning based on detailed knowledge of Aragona, how it has been applied, and current Service positions.

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.

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Outline

  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

Benefits

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?

Faculty

Fletcher, Eric
Eric S. Fletcher, CPA
Principal
Thompson Greenspon

Mr. Fletcher has more than 20 years of public accounting experience and focuses his practice on working with...  |  Read More

Donovan, Michael T.
Michael T. Donovan
Member
Lewis Rice

Mr. Donovan is Chairman of his firm's Tax Department. He has significant experience in all aspects of tax planning...  |  Read More