Gains in DNI, Push-Outs and More Managing the Disparity in Income - - PowerPoint PPT Presentation

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Advanced Trust Drafting for Income Tax Minimization: Including Capital Gains in DNI, Push-Outs and More

Managing the Disparity in Income Tax Treatment Between Beneficiary and Trust

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific WEDNESDAY, MAY 17, 2017

Presenting a live 90-minute webinar with interactive Q&A Robert S. Barnett, Partner, Capell Barnett Matalon & Schoenfeld, Jericho, N.Y . Albert Dumaual, Attorney, Capell Barnett Matalon & Schoenfeld, Jericho, N.Y .

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Advanced Trust Drafting for Income Tax Minimization: Including Capital Gains in DNI, Push-Outs & More

Robert S. Barnett

CPA, JD, MS (TAXATION) CAPELL BARNETT MATALON & SCHOENFELD LLP ATTORNEYS AT LAW (516) 931-8100 rbarnett@cbmslaw.com

5

Albert Dumaual

CAPELL BARNETT MATALON & SCHOENFELD LLP ATTORNEYS AT LAW (516) 931-8100 adumaual@cbmslaw.com

RELEVANCE TO ESTATE PLANNING

There are many intersections between good planning and income tax consequences

6

ESTATE

• SEPARATE legal entity for tax purposes
• Entity handling D’s affairs
• Governed by laws of state D resided in
• Comes into existence and starts tax year

at death

• For reasonable period of administration
• Tax year chosen with filing of first 1041

7

TRUSTS

• SEPARATE legal entity for tax purposes
• Divides ownership and management

from beneficial enjoyment

• Inter vivos/Testamentary
• Revocable/Irrevocable
• Generally use calendar year
• Many different types

8

9

▲

Form Department of the Treasury—Internal Revenue Service

1041 U.S. Income Tax Return for Estates and Trusts

2016

OMB No. 1545-0092 A Check all that apply: Decedent’s estate Simple trust Complex trust Qualified disability trust ESBT (S portion only) Grantor type trust Bankruptcy estate-Ch. 7 Bankruptcy estate-Ch. 11 Pooled income fund

For calendar year 2016 or fiscal year beginning , 2016, and ending , 20

Name of estate or trust (If a grantor type trust, see the instructions.) C Employer identification number Name and title of fiduciary D Date entity created Number, street, and room or suite no. (If a P.O. box, see the instructions.) E Nonexempt charitable and split- interest trusts, check applicable box(es), see instructions. Described in sec. 4947(a)(1). Check here if not a private foundation . . .

Described in sec. 4947(a)(2) City or town, state or province, country, and ZIP or foreign postal code B Number of Schedules K-1 attached (see instructions) ▶ F Check Initial return Final return Amended return Net operating loss carryback applicable boxes:

Change in fiduciary's name Change in fiduciary's address G Check here if the estate or filing trust made a section 645 election . . . . . . ▶ Trust TIN ▶

Income

1 Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . 2a Total ordinary dividends . . . . . . . . . . . . . . . . . . . . . . . . b Qualified dividends allocable to: (1) Beneficiaries

(2) Estate or trust

3 Business income or (loss). Attach Schedule C or C-EZ (Form 1040) . . . . . . . . . 4 Capital gain or (loss). Attach Schedule D (Form 1041) . . . . . . . . . . . . . . 5 Rents, royalties, partnerships, other estates and trusts, etc. Attach Schedule E (Form 1040) . 6 Farm income or (loss). Attach Schedule F (Form 1040) . . . . . . . . . . . . . . 7 Ordinary gain or (loss). Attach Form 4797 . . . . . . . . . . . . . . . . . . 8 Other income. List type and amount 9 Total income. Combine lines 1, 2a, and 3 through 8 . . . . . . . . . . . . . ▶ 1 2a 3 4 5 6 7 8 9

Deductions

10

• Interest. Check if Form 4952 is attached ▶

. . . . . . . . . . . . . . . 11 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Fiduciary fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Charitable deduction (from Schedule A, line 7) . . . . . . . . . . . . . . . . 14 Attorney, accountant, and return preparer fees . . . . . . . . . . . . . . . . 15a Other deductions not subject to the 2% floor (attach schedule) . . . . . . . . . . . b Net operating loss deduction. See instructions . . . . . . . . . . . . . . . . c Allowable miscellaneous itemized deductions subject to the 2% floor . . . . . . . . . 16 Add lines 10 through 15c . . . . . . . . . . . . . . . . . . . . . . ▶ 10 11 12 13 14 15a 15b 15c 16 17 Adjusted total income or (loss). Subtract line 16 from line 9 . . . 17 18 Income distribution deduction (from Schedule B, line 15). Attach Schedules K-1 (Form 1041) 19 Estate tax deduction including certain generation-skipping taxes (attach computation) . . . 20 Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Add lines 18 through 20 . . . . . . . . . . . . . . . . . . . . . . . ▶ 18 19 20 21

Tax and Payments

22 Taxable income. Subtract line 21 from line 17. If a loss, see instructions . . . . . . . . 23 Total tax (from Schedule G, line 7) . . . . . . . . . . . . . . . . . . . . 24 Payments: a 2016 estimated tax payments and amount applied from 2015 return . . . . b Estimated tax payments allocated to beneficiaries (from Form 1041-T) . . . . . . . . c Subtract line 24b from line 24a . . . . . . . . . . . . . . . . . . . . . d Tax paid with Form 7004. See instructions . . . . . . . . . . . . . . . . . . e Federal income tax withheld. If any is from Form(s) 1099, check ▶ . . . . . . . .

Other payments: f Form 2439 ; g Form 4136 ; Total ▶

25 Total payments. Add lines 24c through 24e, and 24h . . . . . . . . . . . . . ▶ 26 Estimated tax penalty. See instructions . . . . . . . . . . . . . . . . . . . 27 Tax due. If line 25 is smaller than the total of lines 23 and 26, enter amount owed . . . . . 28

• Overpayment. If line 25 is larger than the total of lines 23 and 26, enter amount overpaid . .

▶ ▶

22 23 24a 24b 24c 24d 24e 24h 25 26 27 28 29

Sign Here

Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge. ▶

Signature of fiduciary or officer representing fiduciary Date EIN of fiduciary if a financial institution

Paid Preparer Use Only

Print/Type preparer's name Preparer's signature Date Check if self-employed PTIN Firm's name

Firm's EIN ▶ Firm's address ▶ Phone no.

For Paperwork Reduction Act Notice, see the separate instructions.

• Cat. No. 11370H

Form 1041 (2016)

INCOME TAX RATES

RATE TAXABLE INCOME NOT OVER… Married Filing Separately Individual Head of Household Married Filing Jointly 10% $9,325 $9,325 $13,350 $18,650 15% $37,950 $37,950 $50,800 $75,900 25% $76,550 $91,900 $131,200 $153,100 28% $116,675 $191,650 $212,500 $233,350 33% $208,350 $416,700 $416,700 $416,700 35% $235,350 $418,400 $444,550 $470,700 39.6% Over $235,350 Over $418,400 Over $444,550 Over $470,700

10

ESTATE & TRUST INCOME TAX RATES

• Income Tax & Capital Gain: 39.6% and 20% rates apply when

trust taxable income over $12,500

• Medicare: 3.8% surtax on lesser of (i) undistributed net

investment income; or (ii) excess of AGI over $12,500 = 43.4% income tax rate or 23.8% capital gain tax rate

2016 ESTATE & TRUST INCOME TAX RATES Taxable Income… Income Tax Rate Capital Gain Rate Not over $2,550 15% 0% $2,550 - $6,000 25% 15% $6,000 - $9,150 28% 15% $9,150 - $12,500 33% 15% Over $12,500 39.6% (+ 3.8% surtax) 20% (+ 3.8% surtax)

11

PLANNING CONSIDERATIONS

• Decedent’s Losses – how to utilize
• IRD – Avoid installment sales
• S Corps: Grantor Trusts, QSST, ESBT
• Separate Shares

–Draft to permit severance –Allocation of GST –Life Insurance Trust for grandchildren –Elect Reverse QTIP

12

PLANNING CONSIDERATIONS

• Drafting for Charitable Bequests
• Passive Activities
• DNI – Define income

– Trustee powers and discretion

• IRAs and QTIP Trusts

– Distribute “income of the retirement plan”: plan’s internal investment income OR unitrust amount

• In kind distribution – avoid specific bequests

– PASS THE GAIN

13

DECEDENT’S LOSSES

• Decedent’s Losses –only deductible on

Final 1040 (ex. worthless securities)

• NOL’s – two year carryback
• PAL’s – Special Rules
• Capital losses – not passes to estate
• Casualty losses – three year carryback
• Remaining loss is disregarded- does not

pass to estate

14

MEDICAL EXPENSES

• Paid before death: 1040 deduction
• Paid after death: Deduct on 706, or
• Elect to take deduction on 1040 if

–paid by estate within 1 year of death & –File duplicate statement with 1040 stating did not take as a estate tax deduction and estate waives right to take as a deduction

15

SIMPLE TRUST

• Governing instrument controls
• Trust provides ALL income be distributed

currently

• Does not pay, permanently set aside or use

any amounts for charitable purposes AND

• NO principal distributions actually made
• Annual exemption: $300

16

COMPLEX TRUST

• Any trust that is NOT a

simple trust

• Annual Exemption: $100

17

§ 1411 MEDICARE SURTAX:

TRUSTS/ESTATES

3.8% surtax on the lesser of:

• Undistributed net investment income OR
• Excess, if any, of

–AGI (as defined in 67(e)) over –Dollar amount which the highest tax bracket in section 1(e) begins (2017 - $12,500)

18

NET INVESTMENT INCOME

• Gross income from interest, dividends, annuities,

royalties, and rents, other than from an ordinary trade or business;

• Gross income from passive activity or trade/business

involving trading in financial instruments/commodities; and

• Net gain from disposition of property, other than

property held in trade or business

• Gain from passive activity or trade/business

trading in financial instruments/commodities

• Less allocable deductions

19

INDIVIDUALS VS. TRUSTS/ESTATES

• Surtax applies to Trust/Estates on

amounts over $12,500

• Individuals – threshold amount varies

–Taxpayer filing joint return - $250,000 –Married filing separately - $125,000 –All other cases - $200,000

• Greater exposure for trust/estate

20

INDIVIDUALS VS. TRUSTS/ESTATES

• Trust/Estate surtax on undistributed net

investment income

• Distributions to beneficiaries - may avoid

surtax at trust/estate level

• Tax spread over many beneficiaries vs. tax to

trust/estate

• Governing instrument must allow for

distributions

21

WHAT IS INCOME?

• Treasury definition
• Income in respect of decedent

(IRD) – discussed later

• Fiduciary accounting income –

Governing instrument & state law control (NY- EPTL)

22

FIDUCIARY ACCOUNTING INCOME (FAI)

• Different from taxable income
• Income the settlor intended the

income beneficiary to receive

• Governing instrument & local

law control allocations

23

INCOME & PRINCIPAL

• State Law defers to governing instrument
• Principal: Property held for remainder B

– Includes capital gain

• Income: Return from principal assets

– Rent from property – Interest – Corporate distributions – classification varies – Extraordinary distributions – Principal – Business income

24

NY EPTL 11-A-1.2: INCOME & PRINCIPAL

• Defers to governing instrument
• Principal: Property held for remainder B

– Includes capital gain

• Income: Return from principal assets

– Rent from property (Sch. E) – Interest – Corporate distributions – classification varies – Extraordinary distributions – Principal – Business income (Sch. C)

25

TREASURY REG § 1.643(b)-1

• Income determined under governing

instrument and applicable local law

• “Trust provisions that depart

fundamentally from traditional principles of income and principal will generally not be recognized.”

26

CALCULATING TAX LIABILITY

• Gross income
• Less deductions/expenses
• Less income distribution

deduction

• Less special exemption

27

INCOME IN RESPECT OF DECEDENT

28

IRD

• Income D earned prior to death
• Not included in D’s income
• Recipient taxed in year receives income
• Retains same character
• Accrued income, accrued vacation,

treasury bond interest; Annuities; IRA (watch beneficiary designations!!!!)

• Use to fund charitable bequests

29

IRD

• No basis step up
• Installment sale proceeds(same GP %)
• Controversy – was closing certain to
• ccur
• Sale of building (was contract subject to

contingences?)

• Were conditions other than ministerial?

30

DEDUCTIONS

32

DEDUCTIONS

• Interest (Note: Expenses allocated to tax exempt

interest are not deductible)

• Taxes
• Charitable Deductions – special rules
• Attorney, Accounting, and Fiduciary Fees
• NOL – active NOL from trade or business may offset
• ther income but generally do not pass through to

the B’s during administration

• 1041- NOL carryback 2 years and carryover 20 years
• Depreciation (no Sec. 179 Election) – may be

apportioned

• Casualty losses – if exceed 10% of AGI

33

1041 SPECIAL DEDUCTIONS

• Income Distribution Deduction
• Estate Tax Deduction for IRD
• Personal Exemption

–Estate $600 –Simple Trust $300 –All other trusts $100

34

DISTRIBUTION DEDUCTION

• Estate/Trust is a pass through entity
• Avoids double taxation
• Deduction for income paid, created
• r required to be distributed to B
• B reports income (based on K-1)
• Income retains same character
• Calculated on Sch. B of 1041

35

SPECIFIC BEQUESTS

• No distribution deduction
• 1. Required by Will;
• 2. Specific sum of money or

property; and

• 3. Three or fewer installments

under the Will

36

§642(g) - DOUBLE DEDUCTIONS

• Administrative expense deduction on EITHER

706 OR 1041

• Elect on 1041: file statement and waiver
• Statement–item not allowed as 706 deduction
• Waiver – waive right to take as 706 deduction
• Can waive until “finally allowed” on 706
• Exception: §691 (b) deductions- can claim on

both

37

§642(g) - FILING

• Timely election
• Filed with 1041 for year the deduction is claimed
• Anytime before the statute of limitations for that

year expires

• Even if taken on 706- if not finally allowed on

706

• Election irrevocable

38

DISTRIBUTABLE NET INCOME CONDUIT PRINCIPLE

39

HYPOTHETICAL

Trust realizes $12,500 of dividends and $60,000 of capital gain

• Traditional trust income taxation:

–$12,500: Income taxed to B –$60,000: Capital Gain taxed to Trust

• Trust’s Income Tax > $14,000 (approx.)
• ALTERNATIVELY, if all is taxed to B and B has no
• ther income:
• B’s Income Tax < $3,800

40

PLANNING OPPORTUNITY

Potential significant savings if shift income tax burden from trust to beneficiary – Avoid condensed trust income tax brackets – Utilize Beneficiary’s tax bracket – Avoid 3.8% Medicare surtax

41

REDUCE TAX BURDEN:

Beneficiary-Level Taxation

• Include capital gain in Distributable

Net Income – Treas. Reg. 1.643(a)-3

• In Kind Distribution – IRC § 643(e)(3)
• 65 Day election – IRC § 663(b)

42

DISTRIBUTABLE NET INCOME

• Governs allocation of trust taxable

income between trust and beneficiaries

• Limits trust’s distribution deduction
• Limits beneficiary-level taxation, even

if a greater amount is distributed

• Determines character and amount of

distribution

43

CALCULATING DNI

TAXABLE INCOME, modified as follows:

• No deduction for distribution
• No deduction for personal exemptions
• Generally exclude capital gains
• Generally exclude capital losses
• Simple trusts: Exclude extraordinary dividends

and taxable stock dividends allocated to corpus and not distributed

• Include tax-exempt interest paid on state and

local bonds, reduced by allocable disbursements

44

DNI EXAMPLE 1

45

Complex Trust; income distribution required

• Interest

$7,500

• Dividend

$14,500

• Capital Gains

$5,000

• Admin Expenses

$5,000

• Distributions

$27,000

DNI EXAMPLE 1 (cont.)

* Limited to DNI

46

• Total Income

27,000

• Expenses
• 5,000
• Distribution Deduction*
• 17,000
• Exemption
• 300
• Taxable Income

4,700

WHAT IS INCLUDED IN NII, BUT NOT IN DNI?

47

ANSWER: CAPITAL GAIN

DNI & NII

• 3.8% surtax imposed on undistributed

net investment income (NII)

• Reduce trust taxes: Distribute NII

48

DNI & NII

• Allocate DNI distributions

EXAMPLE

• DNI: $50,000 interest & dividends
• Distribution: $10,000, or 20%
• Distributed NII = $10,000 (20% of $50,000)
• Undistributed NII = $40,000

49

CAPITAL GAINS

• Allocated to principal
• Generally excluded from DNI
• Taxed to trust (capital gain rate + NII)
• Treas. Reg. 1.643(a)-3: Capital gain

included in DNI if fiduciary utilizes one

• f two prerequisites and one of three

methods

–Result: Beneficiary-level taxation

50

TWO PREREQUISITES

Inclusion is pursuant to:

• (1) Governing instrument and local law;

OR

• (2) Reasonable and impartial exercise of

discretion by the fiduciary (in accordance with a power granted to the fiduciary by local law or by governing instrument if not prohibited by local law)

51

THREE METHODS

• (1) Allocated to income (unitrust exception);
• (2) Allocated to corpus but treated

consistently by the fiduciary on the trust’s books, records, and tax returns as part of a distribution; or

• (3) Allocated to corpus, but actually

distributed or utilized by the fiduciary in determining the amount that is distributed or required to be distributed

52

GOVERNING INSTRUMENT

• Allocation according to trust terms?
• Discretion and power to:

–Distribute trust principal –Allocate receipts and disbursements between income and principal –Include capital gains in income

• If silent, must rely on local law

53

STATE PRINCIPAL & INCOME ACTS

• Allocates receipts and disbursements

between income and principal

• Duty of impartially between income

and principal beneficiaries

• Coordinates with Prudent Investor Acts

54

STATE PRUDENT INVESTOR ACTS

• Governs investment and management of

trust property

• “Overall investment strategy”
• Facilitates investing for total return
• “Standard of conduct, not outcome or

performance”

• *Discretionary power to adjust

55

POWER TO ADJUST

• Transfer between income and principal
• To administer trust impartially, fairly,

and reasonably among all beneficiaries

• Trust must allow income distributions

56

POWER TO ADJUST

• Consider all relevant factors

–Expected tax consequences –Beneficiaries’ circumstances –Asset type

57

POWER TO ADJUST

• Prohibited in certain circumstances

–Reduces spouse’s income interest (marital deduction) –Trustee is beneficiary –Affects amounts devoted to charity

58

DNI & CAP GAINS METHOD 1

(INCOME)

• YEAR 1: Trust earns $60,000 of capital

gain; Trustee wishes to include in DNI

• Look to governing instrument
• If silent, review discretion and powers

–E.g.: Income to B; discretion to distribute principal (standard provision)

• Look to local law

59

DNI & CAP GAINS METHOD 1

(INCOME)

• Local law grants power to adjust to transfer

between principal and income

• T considers relevant factors

–Income & remainder beneficiaries’ needs, trust assets, economic conditions, anticipated tax consequences, etc.

• T allocates capital gain to income
• Sufficient?

60

DNI & CAP GAINS METHOD 2

(CONSISTENCY)

• Governing instrument is silent as to

allocation of capital gain

• Grants discretion to distribute

principal

• Grants discretion to include capital

gain in distribution

61

DNI & CAP GAINS METHOD 2

(CONSISTENCY)

• YEAR 1: T intends to follow regular practice of

treating discretionary distributions of principal as paid first from capital gain

• Evidence this by including capital gain in DNI on

Trust’s 1041

• FUTURE: T must treat all discretionary

distributions as being made first from any realized capital gain

62

DNI & CAP GAINS METHOD 3A

(ACTUALLY DISTRIBUTED)

• Trust contains stock of Corp M
• Governing instrument: At age 35,

distribute one-half of principal

• At 35, T sells one-half of stock
• T actually distributes the proceeds and

attributable capital gain

63

DNI & CAP GAINS METHOD 3B

(UTILIZED)

• Trust contains Blackacre and other property
• Governing instrument: After 10 years, sell

Blackacre and distribute proceeds

• T uses sale proceeds (which includes any

realized capital gain) to determine amount required to be distributed

64

IRC § 643(e) “IN KIND” DISTRIBUTION

• B reports capital gain on sale of appreciated

property received from trust/estate

–B’s basis: lesser of carry-over or FMV –Avoids trust-level taxation –Does not apply to specific bequests

• Governing instrument should expressly

grant discretion to distribute in kind

• Avoid IRC § 643(e)(3) election

65

IRC § 643(e)(3) ELECTION

• Property treated as “sold” at FMV
• Trust/estate pays tax
• B receives property, basis = FMV
• New holding period
• Can only revoke with IRS consent

66

BEST PRACTICE

• Clearly describe settlor’s intent
• Expressly grant fiduciary discretion to:

–Distribute principal –Allocate receipts and disbursements between income and principal –Include capital gains in income –Distribute in cash or in kind, or partly in cash and partly in kind

67

65 DAY ELECTION – IRC § 663(b)

• Distributions paid/credited within first 65 days
• f any taxable year of estate or trust treated as

paid on last day of previous year

• Cannot exceed: 1) Entity's accounting income for

year of election or 2) DNI

• MUST ELECT (P. 2, Other information, Line 6)
• Election irrevocable once period for filing return

expires (including extensions)

68

PLR 201115004

• Trust was granted an extension to

file IRC § 663(b) election

• Taxpayer acted reasonably and in

good faith

69

PASSIVE ACTIVITY LOSSES

71

PASSIVE ACTIVITY LOSSES

• Any activity involving a trade or business
• Taxpayer does NOT MATERIALLY PARTICIPATE
• Material Participation – REGULAR, CONTINUOUS

and SUBSTANTIAL

• 7 Tests – Treas. Reg. § 1.469-5T
• More than 500 HOURS is favorite
• Limited partner has only 3 methods

72

DNI & PASSIVE LOSSES

• Beneficiary income is limited to DNI
• Trustee/executor allocates deductions against

income classes

• Typically, beneficiary cannot deduct estate/trust

losses

• Generally, excess deductions and losses pass

through in final year

73

DNI & PASSIVE LOSSES

• Disallowed passive losses not

included in DNI

• Disallowed passive losses not

allocated to other income classes

74

ESTATE AND TRUST DISTRIBUTIONS

• §469(j)(12) – “If any interest in a passive

activity is distributed by an estate or trust- (A) the basis of such interest immediately before such distribution shall be increased by the amount of any passive activity losses allocable to such interest, and (B) Such losses shall not be allowable as a deduction for any taxable year.” Consider sale- gain will free suspended losses

75

ACTIVE PARTICIPATION (REAL ESTATE)

• $25,000 deduction if:

–Taxpayer (natural person) actively participates –Estate ends less than 2 years after D’s death, if D actively participated

• Reduced by amount claimed by surviving spouse
• Income phase-out limits
• After 2 years, rental real estate becomes passive

76

MATERIAL PARTICIPATION

• Reg. 1.469-5T does not provide

guidance for Trusts and Estates

• Controversy exists

77

CONTROVERSY

• Mattie K. Carter Trust: Participation

measured by activities of all who conduct business on trust’s behalf

–256 F. Supp.2d 536

78

CONTROVERSY

• IRS disagrees
• TAM 200733023: Estate/Trust

participation measured by activities

• f fiduciaries
• Fiduciary must participate on regular,

continuous, and substantial basis

79

Frank Aragona Trust

• Court held Trust Materially Participated
• Trustees’ activities as employees of SM

LLC counted

• Trustee Duties of Loyalty
• Trust met § 469(c)(7) exception
• 142 T.C. No. 9 (2014)

80

FRANK ARAGONA TRUST continued

• Tax Court recognized Trustee-Employee

activities

• Did not need to consider activities of
• ther employees
• Trust met § 469(c)(7) exception
• Trust materially participated in rental

activity

81

FRANK ARAGONA TRUST & TRUSTEE OWNERSHIP IN ACTIVITY

• Trustees also owned interests personally
• IRS said – could not allocate participation to

Trust

• Not in this case because:

– Personally owned small, minority interest; – Combined ownership never exceeded Trust; – Compatible goals; and – Trustee involved in day-to-day management

82

WHAT FRANK ARAGONA TRUST DID NOT SAY

• Whether non-trustee employees count
• Hours of personal services rendered
• Whether one trustee’s activity alone sufficient
• What test used to find material participation
• Whether 5% ownership rule applicable
• Court did not apply > 50% test
• What if trustee owned > %

83

REAL ESTATE PROFESSIONALS

• May treat rental real estate losses as NONPASSIVE
• §469(c)(7)(B)
• May use passive losses to offset active income –

SUBJECT TO material participation requirements

• Employee must be more than 5% OWNER

84 84