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

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 Tuesday, September 27, 2016

Recorded event now available

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This course will provide tax professionals with a deep dive into the determination of “material participation” (MP) as the concepts apply to trusts and estates in the application of passive activity rules. The panel will analyze the tax court’s groundbreaking holding in Aragona Trust v. Comm'r and provide their perspectives on MP issues that Aragona did not address or provide specific guidance on structuring trust holdings. The panel will outline practical approaches consistent with Aragona and Service 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 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.

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

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

Keith K. Grissom
Atty
Greensfelder Hemker & Gale

Mr. Grissom counsels businesses and individuals on matters including estate planning and closely held business... | Read More

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