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Tax Law Roundup current law developments in U.S. taxation

Tax Court Decision Will Help Trusts Avoid Passive Loss Limitations and New 3.8% Tax

Posted in General, Passthrough Entity, trusts and estates

In a highly watched case of The Frank Aragona Trust v. Comm’r., the Tax Court held that it was possible for a trust to qualify for the coveted title of “real estate professional” under the Section 469 passive loss rules.  This result greatly expands the ability of trusts to avoid the passive loss deduction limitations and the new Section 1411 3.8% net investment income tax.

In the case the IRS argued that a trust could not be a real estate professional because the statutory test for real estate professional status looked to “personal services,” and a trust was an entity that could not perform personal services.  The IRS also argued that if a trust could qualify, the relevant participation must come from the fiduciaries in their capacity as fiduciaries and not as employees .  The court clearly disagreed with the first argument and held that a trust could qualify as a real estate professional.  The court did not need to decide the second issue since it found that the trustees who were also full-time employees were always acting as fiduciaries.