Can Trustees Satisfy Participation Requirements of a Trust?

There are differing perspectives regarding whether an S-Corporation is experiencing active participation in trust when shareholdings are being held in a trust. The perspectivesstem from section 469 of the Internal Revenue Code. Section 469 sets theparameters of passive activity as any activity that includes trading orbusiness where the taxpayer does not “materially participate.” This sectionalso includes trusts. Additionally, the Treasury Departmenthas not clarified the practical participation requirements. As a result of this ambiguity, there are questions about the participation requirements and if they are satisfied by the trustee of a trust.  

Recently, the IRS addressed this issue in a memo. The IRSstates that a trust is the same as a shareholder in that he is unable to makeuse of the efforts of the shareholder’s or the corporation’s employees to fulfillthe material participation requirement. The trustee’s activities must beevaluated to resolve whether the trust has materially participated. Moreover,day-to-day activities of a special trustee are not counted if those duties arelimited to selling or voting the corporation’s shares and omit the power tocommit the trust or control trust property.  

See Christopher Fidler Beware: Active Participation of S- Corporation Trustee Shareholder is Required – Technical Advice Memorandum 201317010, Wealth Planning Examiner,  Aug. 6, 2013.

Special thanks to Brian Cohan (Attorney at Law, Law Offices of Brian J. Cohan, P.C.) for bringing this article to my attention.