In March 2014, I commented on the US Tax Court decision in the Frank Aragona Trust case. In that case, the tax court disagreed with the Internal Revenue Service’s arguments that a trust was incapable of providing “personal services” to meet the material participation test under IRC § 469 (c)(7).
In November 2013, when the Service issued the final net investment tax rules, it promised to address the material participation dilemma. To date, no guidance other the Service’s arguments in several court cases have been issued.
Most practitioners take the position that a fiduciary’s participation in the activities in question in any capacity should count for purposes of the material participation determination. The American Institute of CPAs (AICPA) has recommended that when there are multiple fiduciaries, material participation by any one fiduciary should be sufficient for purposes of satisfying the material participation test under IRC § 469 (c)(7). The American Bar Association (ABA), in a recent letter to the Service, urged the Service to allow fiduciaries of a trust or estate to use the same tests that individuals use to establish material participation in a trade or business. The ABA’s letter proposed two alternative tests to determine whether an individual materially participated: an objective hours test and a subjective facts and circumstances test. The hours test would be satisfied on the basis of hours invested by an individual with fiduciary duties to the beneficiaries of the trust or estate, if that individual has the decision-making authority and power to act on behalf of the trust or estate in the trade, business or rental activity. The facts and circumstances test would be satisfied by aggregating the participation of all fiduciaries of the trust or estate, their employees, and agents in the trade, business or rental activity. The Service’s position has been that the activities of a fiduciary’s agents and employees are not considered for purposes of material participation; however, the holdings in the Frank Aragona Trust and Mattie Carter Trust cases, along with continued urging from practitioners, might influence any guidance from the Service on these issues.
The waiting continues.