The U.S. Tax Court held in a 2014 case that a trust can “materially participate” in a trade or business while avoiding the “passive activity loss rules” in certain instances. The court held that the activities of a Trustee could be looked at to determine if the trust was materially participating in the business and not merely a passively participating. This article discusses the two general issues with passive activity income regarding the limits on the amount of losses that can be reported on an income tax return and the Net Investment Income Tax (NIIT). “This ruling opens the door for certain taxpayers to have the advantages that trust ownership and active participation in the business provide.” There are many unanswered questions that still remain and any person wishing to take advantage of this decision should make sure to hew closely to the facts of the case and pay close attention to the tax court decision.
See Trusts And Avoiding Passive Activity Loss Rules, Wealth Management, November 16, 2015.
Special thanks to Jim Hillhouse for bringing this article to my attention.
