Instead, pay the tax that will be non-deferred and request an extension. The IRS is lenient in granting extensions to pay and file if done on a timely basis. 3.8% Surtax. Passive loss rules had not had great impact on trusts until recently since clients generally did not generate net losses inside a trust. Now we are concerned about passive income in a trust because of the 3.8% surcharge as this includes passive activity gross income. This is an activity in which the taxpayer does not materially participate. This test is easy to understand on an individual level, but how can a trust materially participate. 1.469-5T(g) entitled “Material participation of trusts and Since 1980 no estates” – “Reserved.” guidance has been provided. The IRS has taken a consistent position that a trust is only a material participant if trustee participates. IRS says time spent as an officer, director or employee will not count as that person is not taking those actions wearing a fiduciary hat. That position is incorrect and inconsistent with the concepts as applied to say an S corporation employee/shareholder. A fiduciary cannot remove that and act in a non-fiduciary capacity as an “fiduciary hat” employee. Frank Aragona Trust v. Commr., 142 TC No. 9 Case. Trust was sole owner of LLC a disregarded entity that operated real estate so effectively the trust was conducting the real estate activity. The trust had six trustees. Three trustees were full time employees of the LLC owned by the trust. The trust took the position that since 3 trustees materially participated in the business that the trust was a material participant. IRS said you cannot count those hours done in employee capacity. Tax Court said IRS is wrong and activities of trustees who are employees and who materially participate in business interest owned by trust that is a materially participating activity and the Surtax should not apply. Courts will have to give deference to Regulations when issued. Issue that concerns IRS is ability to use trusts as a tax shelter. It may be several years before we see guidance in this area. Reg. Sec. 1.67-4 TD 9664 Regarding IRC Sec. 67(e) Regulations. Regulations issued in response to Knight decision.
Instead, pay the tax that will be non-deferred and request an extension. The IRS is lenient in granting extensions to pay and file if done on a timely basis. 3.8% Surtax. Passive loss rules had not had great impact on trusts until recently since clients generally did not generate net losses inside a trust. Now we are concerned about passive income in a trust because of the 3.8% surcharge as this includes passive activity gross income. This is an activity in which the taxpayer does not materially participate. This test is easy to understand on an individual level, but how can a trust materially participate. 1.469-5T(g) entitled “Material participation of trusts and estates” – “Reserved.” Since 1980 no guidance has been provided. The IRS has taken a consistent position that a trust is only a material participant if trustee participates. IRS says time spent as an officer, director or employee will not count as that person is not taking those actions wearing a fiduciary hat. That position is incorrect and inconsistent with the concepts as applied to say an S corporation employee/shareholder. A fiduciary cannot remove that “fiduciary hat” and act in a non-fiduciary capacity as an employee. Frank Aragona Trust v. Commr., 142 TC No. 9 Case. Trust was sole owner of LLC a disregarded entity that operated real estate so effectively the trust was conducting the real estate activity. The trust had six trustees. Three trustees were full time employees of the LLC owned by the trust. The trust took the position that since 3 trustees materially participated in the business that the trust was a material participant. IRS said you cannot count those hours done in employee capacity. Tax Court said IRS is wrong and activities of trustees who are employees and who materially participate in business interest owned by trust that is a materially participating activity and the Surtax should not apply. Courts will have to give deference to Regulations when issued. Issue that concerns IRS is ability to use trusts as a tax shelter. It may be several years before we see guidance in this area. Reg. Sec. 1.67-4 TD 9664 Regarding IRC Sec. 67(e) Regulations. Regulations issued in response to Knight decision.