Trustees, executors, and their tax advisers have long struggled with the application of the passive activity rules to trusts and estates. While the rules for individual taxpayers are clear (or, clearer), the rules for fiduciaries remain vague.
A recent Technical Advice Memorandum (TAM ) from the IRS advance the set of parameters that fiduciaries must use to determine when an activity is treated as passive by a trust or estate.
An activity is passive if the taxpayer does not materially participate in the activity. IRC §469(h)(1) defines material participation. More specific guidance for individuals is given in the regulations [Temp. Treas. Reg §§ 1.469-tT(a)(1)-(7)].
However, no statutes or regulations specifically address how to determine material participation for a fiduciary. Instead, only one court decision and a few PLRs are available for guidance.
The one court case is Mattie K. Carter Trust v. U.S. (256 F. Supp.2d 536). In this case, the IRS argued that only the activities of the trustee could be used to determine material participation. Instead, the court considered the activities of the trustee, employees, and agents in terming material participation.
In the present TAM, the trustee argued that he materially participated in the activities of businesses owned by the trust. The TAM distinguished between the activities of the trustee in his fiduciary capacity and his activities as an employee of a business subsidiary, and found (in this case) that the trustee’s fiduciary authority was limited by the trust document.
See: TAM 201317010
For more on this TAM, see Peter Reilly’s post on his Forbes blog.
Also, Joe Kristan has a great post on his blog at Roth & Co.