A live CPE webinar on Thursday, November 9 @ 1:00pm EST

IRC Section 469 disallows passive activity losses for all taxpayers (including trusts) who do not “materially participate” (MP) in the business. Until the passage of IRC 1411 imposing the net investment income tax (NIIT), trustees and advisers were seldom concerned with passive activity loss rules. Now, trust income is subject to the 3.8% NIIT, unless the trust “materially participated” in the activity that generated the income.

The U.S. Tax Court’s ruling in Aragona Trust was a significant taxpayer victory for trusts owning business interests, after many years of narrow IRS interpretations of existing regulations to situations where businesses were managed by trusts and little guidance on what constituted material participation.

However, Aragona left unanswered significant questions regarding trust ownership of real estate assets that can meet the MP rules in all instances. Tax advisers to trusts must thoroughly grasp the post-Aragona MP test to avoid unnecessary NIIT on trust income.

The trust taxpayer is in the best position to claim non-passive activities with an adviser’s proactive planning based on detailed knowledge of Aragona, how it has been applied, and current Service positions.

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?


Eric S. Fletcher, CPA
Thompson Greenspon

Michael T. Donovan
Lewis Rice

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