IRS Limits Material Participation by Non-Grantor Trusts

In a recent Technical Advice Memorandum (TAM), the IRSlimited “the circumstances in which a complex, non-grantor trust can materiallyparticipate in the activities of an S corporation.”  The IRS concluded that only time spent by afiduciary in a fiduciary capacity counts towards material participation in Scorporation activities.  Time spent as ashareholder or an employee should not be counted as materialparticipation.  The reasoning of this TAMapplies to alternative minimum tax rules as well as “passive activity loss andcredit rules and the new 3.8 percent net investment income tax.”

See Michala P.Irons & Randal J. Kaltenmark, Tax LawAlert – New IRS Guidance Takes Restrictive View of Material Participation byNon-Grantor Trusts, Barnes & Thornburg LLP, May 9, 2013.