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Frank Aragona Trust v Commissioner of Internal Revenue

Case No. 15392-11 (U.S. Tax Ct., Mar. 27, 2014)

T is a trust that owned rental real-estate properties and engaged in other real-estate activities. T’s rental real-estate activities would be considered per se passive activities under I.R.C. sec. 469(c)(2) unless T qualified for the exception found in I.R.C. sec. 469(c)(7). This exception is applicable if more than one-half of the personal services performed in trades or businesses by the taxpayer are performed in real-property trades or businesses in which the taxpayer materially participates and if the taxpayer performs more than 750 hours of services during the year in real-property trades or businesses in which the taxpayer materially participates.

Held: A trust can qualify for the I.R.C. sec. 469(c)(7) exception. A trust is capable of performing personal services within the meaning of I.R.C. sec. 469(c)(7). Services performed by individual trustees on behalf of the trust may be considered personal services performed by the trust.

Held, further, T materially participated in real-property trades or businesses.
















 

 

Judge(s): Richard Morrison
Jurisdiction: U.S. Tax Court
Related Categories: Taxation
 
Circuit Court Judge(s)
Richard Morrison

 
Petitioner Lawyer(s) Petitioner Law Firm(s)
Richard Soble

 
Respondent Lawyer(s) Respondent Law Firm(s)
Brett Chmielewski Internal Revenue Service
Meso Hammoud Internal Revenue Service

 

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enterprises, llc, were subdivided into various categories of expenses; the ignore the activities of the 20 or so non-trustee employees and the 3 trustee- beneficiaries. according to the trust instrument, the five children share equally in estates”). therefore, we must make the determination of whether a trust materially regulation that resolves questions regarding material participation of trusts and closely held c corporations all presuppose that the taxpayer materially participates portfolio income, or business income that is not derived from a id. annette aragona moran full-time employee of holiday losses were reported as being associated with holiday enterprises, llc, including united states tax court the activities of such agents are not attributed to the taxpayer, and the - 14 - section 469(c)(7) by meeting the one-half-of-personal-services test and, in should be reported on line 12 on the face of the return form 1041 “individual taxpayer” meets the requirements of the exception “if more than half conditions of section 7491(a) are satisfied. tax ct. r. pract. & proc. 142(a); * * * * * * the irs disagrees with carter trust v. united states, 256 f. supp. 2d 536,14 the trust. holiday enterprises, llc, is a disregarded entity for federal income tax in its reply brief, the trust argues that the trustee fees are “properly20 personal services the taxpayer performs in a trade or business are in real property trust materially participated in its real-estate operations. the trustees were under tax ct. r. pract. & proc. 155. rental real-estate activity. sec. 469(c)(7)(a). before the years at issue, the trust which the corporation materially participates. in other real-estate activities. t’s rental real-estate activities would be disabled and unable to work, and charles e. turnbull, an outside attorney who is - 12 - (continued...) operating losses, which the trust carried back to its 2003 and 2004 tax years. services performed by the trust. a passive-activity loss is generally defined as the amount, if any, by which18 participate in real-property trades or businesses. the irs concedes that the trust’s all references to sections are to the internal revenue code of 1986, as in us ignore the activities of the three trustees who are employees of holiday of note. first, section 1.469-9(b)(4), income tax regs., provides, in part, that amount of the trust’s passive-activity-loss deductions for each year. trusts. in describing the provision in the bill that would be adopted by the house, aragona and frank s. aragona had minority ownership interests in all of the businesses. for a taxpayer who has materially participated in real-property trades (i.e., the trust or the irs) has the burden of proof. see estate of bongard v. section 469(i) grants a $25,000 allowance to “any natural person” who fulfills that a trust “is treated as materially participating in an activity * * * if an executor conduct of any trade or business in which the taxpayer does not materially participates.” h.r. conf. rept. no. 103-213, at 546 (1993), 1993-3 c.b. 393, 424. computationally, the notice of deficiency did not include the $302,400 in the arguments raised in this case, therefore, we hold the trust meets the section the year. sec. 1.469-1t(a)(1)(i), temporary income tax regs., 53 fed. reg. 5701 performed in trades or businesses by the taxpayer are performed in are to be treated for federal tax law purposes as corporations or partnerships). generally may not be deducted against other income, such as wages, operations full time. the trust’s real-estate operations were substantial. the trust taxpayer’s passive-activity loss is disallowed for the year if the taxpayer is a method for determining whether certain types of corporations have met the11 which the taxpayer materially participates, and (2) such taxpayer - 9 - taxpayer has made an election under section 469(c)(7)(a). if the taxpayer has services during the year in real-property trades or businesses in which charles e. turnbull independent trustee; attorney with services performed * * * by the taxpayer”. sec. 469(c)(7)(b)(i). because the trust conducted some of its rental real-estate activities directly, some aragona’s interests as owners were generally compatible with the trust’s goals-- without merit. section 469(a)(2): individuals, estates, trusts, closely held c corporations, and the taxable year are derived from real property trades or businesses in which the deductions other than passive-activity-loss deductions assumes that the trustee trades or businesses by the taxpayer during such taxable year are - 19 - in 1993 congress enacted section 469(c)(7), which provides that section 2006 84,540.00 16,908.00 personal service corporations. a passive-activity loss is the amount by which the never greater than the trust’s ownership interest. third, frank s. and paul v. the activities of that trust’s employees must be disregarded. in support, the irs participate in an activity. see sec. 1.469-5t(a), (b), (c), and (d), temporary aggregate losses from all the taxpayer’s passive activities for the year exceeds the addition to receiving a trustee fee, paul v. aragona, frank s. aragona, and trades or businesses in which he materially participates.” id. (the bill adopted by (i) more than one-half of the personal services performed in a loss from an activity disallowed under sec. 469(a) is treated as a8 thus, the determination of whether a closely held c corporation meets the the trustee’s attending board meetings. three of the children--paul v. aragona, see also in re estate of butterfield, 341 n.w.2d 453, 459 (mich. 1983) (construing the guise of calling themselves corporate directors who are exercising their or fiduciary, in his capacity as such, is so participating.” the senate committee the table below summarizes the activities of the six trustees on behalf of the house ways and means committee stated that the provision “applies to expenses of the trust’s rental real-estate activities? we need not reach this issue because of our resolution of the first issue. considered per se passive activities under i.r.c. sec. 469(c)(2) unless passive-activity losses for 2005 and 2006. the increase in the passive-activity6 this paragraph shall apply to a taxpayer for a taxable year if-- the principal of the trust under limited circumstances. against other types of income such as portfolio investment act of 1993, pub. l. no. 103-66, sec. 13143(a) and (b), 107 stat. at 440, 441.9 passive activities, a theoretical next step is to determine whether the trust (continued...) considering the activities of all six trustees in their roles as trustees and as business judgment concerning matters of corporate policy.”). therefore their by an individual in connection with a trade or business”. sec. 1.469-9(b)(4), h. r. rept. no. 103-111, at 612-613 (1993), 1993-3 c.b. 1, 188-189. real-estate operations. three of the trustees participated in the trust’s real-estate to disagree with the assumption in the notice of deficiency: the trust apparently taxpayer” falls within the exception. sec. 1.469-9(e)(1), income tax regs. they and the trust wanted the jointly held enterprises to succeed. fourth, frank s. arrangement created either by will or by an inter vivos declaration whereby the irs argues that in determining whether a trust is materially - 17 - 541 (n.d. tex. 2003), which held that the activities of the trust’s non-trustee the taxpayer materially participates. - 24 - instead of $302,400.00 and $302,400.00 shown as a rental expense sec. 6662(a) we hold that, in the context of the arguments presented in this case, the trust’s the income of the trust. frank aragona died in 1981. he was succeeded as trustee real-property trades or businesses in which the taxpayer materially “trustee fees are an expense of the trust and not [holiday enterprises, llc].” to reflect the foregoing, anthony f. aragona disabled; limited involvement in activities were passive activities, a determination that if correct meant that all the petitioner generally bears the burden of proof (and therefore must prove cannot perform personal services. see sec. 1.469-9(b)(4), income tax regs. losses resulted in a decrease in the allowable deductions from gross income for - 11 - this would leave only the relatively insignificant activities of the trustees who are 469(c)(7)(d); see also sec. 1.469-9(c)(3), income tax regs. - 15 - (1993), 1993-3 c.b. 167, 190. the report further stated that an “individual no. 99-514, sec. 501(a), 100 stat. at 2233. section 469(a)(1) provides that a trust’s business 72,000a taxable year are in real property trades or businesses in which he materially exception. - 23 - included in the determination of the trust’s losses from its real estate activities.” butterfield, 341 n.w.2d at 457 (“trustees who also happen to be directors of the for the section 469(c)(7) exception to apply, there must be “personal activity. sec. 469(c)(4). thus, any rental activity is passive per se. purposes. holiday enterprises, llc, managed most of the trust’s rental real-estate deductions related to the rental real-estate activities were passive-activity-loss these two trustees’ efforts in managing the jointly held entities are attributable to rule has no application to the resolution of this case because, as we explain infra, the question of whether the trustee fees were the expenses of the trust’s trustee employees should be disregarded. executive trustee. although the trustees formally delegated their powers to the4 regulation a taxpayer must own at least one interest in rental real estate and satisfy mark l. vorsatz, income taxation of fiduciaries and beneficiaries, sec. 801, at anthony f. aragona). the losses reported as being associated with holiday - 21 - welch v. helvering, 290 u.s. 111, 115 (1933); bronstein v. commissioner, 138 of holiday enterprises, llc--should be considered in determining whether the each of those years, which decreased the net-operating-loss carrybacks to the7 including] where and how material participation is measured[.]”); m. carr entities through which the trust operated its rental real-estate business, some of - 20 - participates in an activity in the absence of regulatory guidance.12 such taxpayer from qualifying as materially participating. however, the operation of the activity on a basis which is regular, continuous, and ii. analysis schmolka, “passive activity losses, trusts, and estates: the regulations (if i “(1) in general.--a qualifying taxpayer must meet the requirements of section for deficiency cases is the circuit in which is located the legal residence of the majority interests and in which paul v. and frank s. aragona owned minority enterprises, llc, a michigan limited liability company that is wholly owned by supra at 614, 1993-3 c.b. at 190. the report does not say that the exception income tax regs., provides that “[a] closely held c corporation meets the 469(c)(7)--the trust did not materially participate in its rental real-estate activities. that the trustee fees were not the expenses of the trust’s rental real-estate activities. the adjustment was made to the rental loss claimed by holiday bill did not yet include the 750-hour test now codified in section 469(c)(7)(b)(ii).) regulations for determining whether taxpayers who are individuals materially regs. (the paragraph (c) provision referred to in the quotation above) provides: the trust beneficiaries, because trustees have a duty to act as a prudent person required by michigan statutory law to administer the trust solely in the interests of deduction on the schedule e for taxable years 2005 and 2006, from probate scrutiny [i.e., duties imposed on trustees by michigan courts] under the passive-activity deductions for the year exceed the passive-activity gross - 4 - that owns rental real-estate properties and is involved in other real-estate business mich. comp. laws sec. 700.813 (1979), a statute in effect from 1979 to 2000 that trustees take title to property for the purpose of protecting or conserving it for the requirements of section 469(c)(7)(b) does not involve the one-half-of-personal- 1. does the section 469(c)(7) exception apply to the trust? the following reason was given for the amendment:9 were not the expenses of the trust’s rental real-estate activities. the trust appears19 paul v. aragona’s combined ownership interest in each entity was not a majority performs more than 750 hours of services during the taxable year in we need not address the trust’s arguments regarding the regulation, which in real-property trades or businesses. sec. 469(c)(7)(b)(i) and (ii); see sec. exception, and that therefore the trust’s rental real-estate activities are not per se activities are not passive-activity-loss deductions. therefore, it is unnecessary to and paul v. aragona were involved in managing the day-to-day operations of the penalty taxpayer materially participates.” h.r. 2264, 103d cong., sec. 14143 (1993). the entities through which the trust operated real-estate holding and real-estate the legislative history states that an individual meets the requirements of we have considered all of the arguments the parties have made, and to the employee of holiday enterprises, 469(c)(7) exception, however, the irs has limited its arguments to the two the taxpayer performed more than 750 hours of services during the year in the determine whether a particular activity is a passive activity. see sec. 469(c)(1) c. conclusion and enacted by congress in amended form as section 469(c)(7), the report of the participating in an activity only if the taxpayer is involved in the operations of the forms 1041, “u.s. income tax return for estates and trusts” and on schedules e, taxation of trusts in subch. j. see, e.g., 1 byrle k. abbin, david k. carlson, and trust (referred to here as a “trustee fee” or collectively as “trustee fees”) in part for “described in” section 469(a)(2). the following taxpayers are “described in”8 total 374,400 activities as employees of holiday enterprises, llc, should be considered in 469(c)(2) does not apply to the rental real-estate activity of any taxpayer who individual trustees on behalf of the trust may be considered personal individual in connection with a trade or business”, the irs contends that a trust generally coordinates the passive-activity-loss rules of sec. 469 with the rules on would in dealing with the property of another, i.e., a beneficiary. mich. comp. materially participated in the trust’s real-estate operations. first, frank s. and 469(c)(7)(b)(ii). both tests must be met.10 following penalties: discussing the final version of the legislation, the 750-hour test. id.; h.r. rept. are performed in real-property trades or businesses, and (2) to determine whether penalties for the 2003, 2004, and 2006 tax years. (the notice of deficiency did not held: a trust can qualify for the i.r.c. sec. 469(c)(7) year deficiency activities.20 in determining whether a taxpayer who qualifies for the sec. 469(c)(7)17 are that: we hold that the trust materially participated in real-property trades or on the basis of these legal principles, the irs would have us ignore the conversion, rental, operation, management, leasing, or brokerage trade or business. docket no. 15392-11. filed march 27, 2014. - 29 - taxpayer must still personally perform sufficient services to establish taxpayer” meets the requirements of the exception “if more than half of the estate activities were passive activities, a determination that increased the5 increase in the trust’s passive-activity loss for each year. used in the first test of section 469(c)(7)(b). second, section 1.469-9(c)(2), or businesses, the next steps in ascertaining whether the taxpayer benefits from the effect for the years at issue. conclude that a trust is capable of performing personal services and therefore can enterprises, llc 72,000 section 469(h) provides that for the purposes of section 469 a taxpayer is ferguson, james j. freeland, and mark l. ascher, federal income taxation of sec. 469(c)(7)(b) provides in part:10 distribution from the trust for tax purposes. treatment to two challenges: (1) that trusts are categorically barred from sec. interest--for no entity did their combined ownership interest exceed 50%. second, which paul v. and frank s. aragona owned minority interests. commissioner, 124 t.c. 95, 111 (2005). section 469(c)(7)(b) consists of two tests. the first test is met if more than one- certain requirements. that congress did not use the phrase “natural person” but “[p]ersonal services” are defined by regulation as “work performed by an (...continued)10 laws sec. 700.7302 (2001) (before amendment by 2009 mich. pub. acts no. 46); materially participating in real-property trades or businesses if the taxpayer is in the case of a closely held c corporation, the requirements of passive activity. * * * incorporated in the court’s findings of fact. the trust is a complex residuary trust the schedule e, for the 2005 and 2006 years.” it also frames the issue as: employees (paul v. aragona, frank s. aragona, and annette aragona moran). s. rept. no. 99-313, at 735 (1986), 1986-3 c.b. (vol. 3) 1, 735. subjecting the person who holds title to the property to duties to deal with it for the expense was moved to line 12 on the face of the return where they the requirements of section 469(c)(7)(b) can be met only by a taxpayer deductions other than passive-activity-loss deductions (and allowed the full in the notice of deficiency, the irs determined that the trust’s rental real- “supplemental income and loss”, and were reflected on line 5. some of the material participation. was a similarly-worded predecessor to mich. comp. laws sec. 700.7302). are not passive activities. if the trust did not materially participate in its rental activity on a basis which is regular, continuous, and substantial. sec. 469(h). impossible to disaggregate the activities they performed as employees of holiday llc 72,000 property trades or businesses in which the taxpayer materially participates. sec. with a trade or business.” this is an interpretation of the term “personal services” materially participate in real-property trades or businesses. in the context of the assumption that the trustee fees are not the expenses of the trust’s rental real-estate disregarded, the activities of the trustees--including their activities as employees15 - 2 - the independent trustee). as expenses of the trust’s rental real-estate activities? trust, then the regulation is inapplicable to taxpayers that are trusts. acted as a management board for the trust and made all major decisions regarding estates, trusts, and beneficiaries, para. 8.01, at 8-1 to 8-8 (3d ed. 2003); leo l. the relevant facts by the preponderance of the evidence) except when the personal services were performed by the trust in real-property trades or businesses. expenses deducted against rental income on schedule e (and reflected on line 5 of the notice of deficiency stated that “[t]he rental losses incurred are deemed5 that for purposes of sec. 469(c)(7)(b) personal services performed as an employee enterprises, llc, and the activities they performed as trustees. the irs does not take the position that the trust should be treated as a11 2t(d)(1), temporary income tax regs., 53 fed. reg. 5716 (feb. 25, 1988). activities such as holding real estate and developing real estate. its principal place the irs asserts that the legislative history of section 469(c)(7) supports its (continued...) during the 2005 and 2006 tax years, the trust incurred losses from its rental section 1.469-9, income tax regs. this regulation states that only a “qualifying the section 469(c)(7) exception “if more than 50 percent of its gross receipts for rental real-estate activities is relevant only if the trust’s rental real-estate activities had practically no other types of operations. the trustees handled practically no businesses. see sec. 469(c)(7)(b)(i) and (ii). thus, a taxpayer is treated as one interest in rental real estate and meets the requirements of paragraph (c) of this ways and means committee report states that the section 469(c)(7) exception maintenance workers, accounts payable clerks, and accounts receivable clerks. in are generally not treated as performed in real-property trades or businesses. this materially participates, and t is a trust that owned rental real-estate properties and engaged - 6 - even though the petition was filed by paul v. aragona, the executive1 employees of holiday enterprises, llc, the trust materially participated in its 2005 -0- -0- frank aragona trust, (2) are the fees that the trust paid to its trustees properly characterized as trust during 2005 and 2006: 469(c)(7) exception thus: findings of fact participating in an activity, only the activities of the trustees can be considered and $302,400 was reported in the category of “other” expenses. on its returns the trust taxable year are derived from real property trades or businesses in materially participated in its rental real-estate activities. if the trust materially - 25 - t.c. 382, 384 (2012). our findings of fact in this opinion are based on the activities against income from nonrental real estate activities or services test and the 750-hour test. the trustees’ holding ownership interests, we are convinced that the trust interests in a number of entities engaged in real-estate holding activities and real- corporation materially participates.” id. the conference report also discussed the (ii) such taxpayer performs more than 750 hours of services include a trust, and real-property trades or businesses. as to whether the trust qualifies for the section benefit of” others); see also sec. 301.7701-4(a), proced. & admin. regs. (“in income. * * * the term “real property trade or business” is defined as any real-property (...continued)9 trust’s various real-estate businesses. sec. 469(c)(7)(c). materially participates may not offset losses from rental real estate than 50 percent of the gross receipts of such corporation for such section 469(h) supplies the definition of what it means to materially the conference report further stated that a closely held c corporation meets the trustee or the trust. see sec. 7482(b)(1)(a) (providing that default appellate venue section.” sec. 1.469-9(b)(6), income tax regs. section 1.469-9(c), income tax considered a passive activity, even if the taxpayer materially participates in the income tax regs., supra. a passive-activity deduction is generally defined as a 1.469-5t(g), temporary income tax regs., 53 fed. reg. 5727 (feb. 25, 1988) commissioner of internal revenue, respondent so treated, the losses from these activities contributed to the amounts of net accuracy-related which, as reported on the returns, included the $302,400 in trustee fees, should be by six trustees. one of the six trustees was an independent trustee. the other3 2004 421,292.00 84,258.40 frank s. and paul v. aragona’s combined ownership interest in each entity was made such an election, then all interests in rental real estate are treated as a single 469(c)(7) exception for the years at issue. $302,400 (the $374,400 in trustee fees minus the $72,000 in trustee fees paid to of deficiency stated: the $72,000 annual trustee fee for anthony f. aragona was reported as aa - 7 - (reserving a place for a regulation to be titled “material participation of trusts and section 469(c)(7) exception, the trust does not qualify because it did not materially annual trustee operations. we hold that it did so. trustees are not relieved of their duties of loyalty to beneficiaries by conducting both phrasings appear to be an obscure reference to the notice of deficiency’s determining whether the trust materially participated in its real-estate operations.16 aggregate income from all the taxpayer’s passive activities for such year. sec. if the taxpayer performs more than 750 hours of “services” during the year in real- - 10 - we need not and do not decide whether the activities of the trust’s non-15 participated in its rental real-estate activities, then its rental real-estate activities corporation. see sec. 301.7701-4(b), proced. & admin. regs. (business trusts, of business was in michigan when it filed the petition. in 1979 frank aragona amounts as fiduciary fees to be deducted on line 12 of form 1041 instead of rental real-estate activities are not passive activities. personal services in a real estate trade or business in which he involvement in trust’s business 14,400 exception has materially participated in a rental real-estate activity, each interest in - 26 - - 28 - through wholly owned entities, and the rest through entities in which it owned once it is determined that the trust qualifies under the section 469(c)(7) a. can a trust qualify for the section 469(c)(7) exception? rental real estate is treated as a separate rental real-estate activity unless the final version of the bill. id. at 547, 1993-3 c.b. at 425. it described the section indeed, if congress had wanted to exclude trusts from the section 469(c)(7) mean that other types of taxpayers cannot fall within the exception. operations through entities in which it owned majority or minority interests and in general, the term ‘trust’ as used in the internal revenue code refers to an the “trust”), determining the following deficiencies in federal income tax and the activity. - 27 - frank s. aragona full-time employee of holiday connection with a trade or business.” sec. 1.469-9(b)(4), income tax regs. we participates. * * * the notice of deficiency determined that the trust’s rental real-estate the irs has confined its challenges to the trust’s qualification for sec. 469(c)(7) (2) in the alternative, even if the word “individual” does not include a - 5 - not intend to exclude trusts from the section 469(c)(7) exception, despite what the form 1041). in explaining the reclassification of the $302,400 in fees, the notice trades or businesses. thus, we need not, and do not, determine how many hours of does not compel the conclusion that only individuals and closely held c activities, to the extent they exceed income from passive activities, deduction of $302,400). the treatment of the $302,400 in trustee fees as18 142 t.c. no. 9 we also note that the irs does not cite sec. 469(c)(7)(d)(ii) in its brief. treated its rental real-estate activities, in which it engaged both directly and the line for deductions for “fiduciary fees”. on its form 1041 for each year, the trust did not enter an amount on line 12, the trust instrument gives the independent trustee the power to distribute3 taxpayer’s passive activities for the year exceed the aggregate income from all the which the irs contends shows that trusts cannot qualify for that exception. the of the personal services the taxpayer performs in trades or businesses during the taxpayer meets the eligibility requirements if (1) more than half of the the irs argues only that the trust is not excepted by section 469(c)(7). it does not participates and if the taxpayer performs more than 750 hours of (1) the word “individual” in the regulation should be interpreted to 8003 to 8004 (2012 ed.) (“section 469 does not easily comport with subchapter j. paul aragona, executive trustee, petitioner v. meets the requirements of the exception. id. the report of the conference while reporting losses for its rental real-estate activities, the trust also are passive activities. contrary to the notice of deficiency, we hold that the trust’s strictly speaking, however, the computations in the notice of deficiency assumed deduction allocable to such activity for the next tax year. sec. 469(b). we now turn to the legislative history of the section 469(c)(7) exception, when the petition was filed, paul v. aragona was a resident of michigan.4 rental real-estate activities were not passive activities. see supra part 1.c. the one-half-of-personal-services test, the 750-hour test, and the special rule for name of trustee role interpreting section 469(h), the department of the treasury has promulgated because the regulation defines “personal services” to mean “any work performed exception, it could have done so explicitly by limiting the exception to “any tests for material participation. the statute does not provide a method for petitioner). we do not reach that particular question. taxable year are derived from real property trades or businesses in which the employees (and of the trustee) are considered in determining whether the trust subsequent tax years, absent changed circumstances--to treat all of its interests in any event we do not mean to suggest whether the petitioner in this case is the were king)”, 58 tax l. rev. 191 (2005). disallowance of current deductions in the amount of the passive-activity loss for the existence of a passive-activity loss for the year results in the7 rental real estate as a single activity. through its ownership interests in a number of entities, as non-passive activities. enterprises, llc. it reasons that the activities of these three trustees should be the irs’s fallback position is that even if some trusts can qualify for the i. the irs’s arguments if the court adopts all these arguments made by the irs, then it should 469(c)(7) treatment, and (2) the trust did not materially participate in real-property business, in which the taxpayer does not materially participate). second, it is used cites s. rept. no. 99-313, at 735 (1986), 1986-3 c.b. (vol. 3) 1, 735, which states participate in an activity. by that definition, a taxpayer is treated as materially beneficiaries under the ordinary rules applied in chancery or probate courts.”). if trustee, for ease of reference we refer to the trust as having filed the petition. in to perform daily functions in running the business does not prevent taxpayer”.13 the senate committee report stated:13 a number of commentators have argued that there is a need for a12 closely held c corporation meets the requirements of section 469(c)(7)(b): the conference agreement follows the house bill, with a its rental real-estate activities exceeded its income from the activities. therefore, report also stated that “the activities of * * * [employees] are not attributed to the the taxpayer * * * are performed in real property trades or businesses in which the the trust filed a petition as permitted by section 6213(a). we have jurisdiction to1 the notice of deficiency also determined that the trust’s schedule e expenses, exception. a trust is capable of performing personal services within we need not consider the effect of sec. 469(c)(7)(d)(ii), which provides16 committee, also describing the bill adopted by the house, similarly stated that an rept. no. 103-111, supra at 614, 1993-3 c.b. at 190. the report did not describe modification. under the conference agreement, an individual preponderance of the evidence. thus, it is unnecessary to determine which party concessions, the two issues remaining for decision are:2 the requirements of section 469(c)(7)(b). two other aspects of the regulation are involved in the operation of real-property trades or businesses on a basis which is section 469(c)(7)(d)(i).” income tax regs. we reject the irs’s argument. a trust is an arrangement trustee duties, their work can be considered “work performed by an individual in exception is applicable if more than one-half of the personal services richard s. soble, for petitioner. involvement in trust’s business $72,000 within the section 469(c)(7) exception by meeting the two tests. but this does not question to be resolved is whether the trust materially participated in its real-estate o’reilly rancilio, p.c.; limited applies only to individuals and closely held c corporations. therefore, the report corporation which is owned or controlled by the trust cannot insulate themselves argue that--in the event that we determine that the trust is excepted by section personal services performed in trades or businesses by the taxpayer during the year 469(c)(7)(b).” thus, to be a “qualifying taxpayer” within the meaning of the (defining passive activity as an activity, involving the conduct of a trade or development, redevelopment, construction, reconstruction, acquisition, other businesses on behalf of the trust. the irs argues that because paul v. reported gains from its other (non-rental) real-estate activities. the trust owned the house had provided that the section 469(c)(7) exception was applicable “if - 30 - meets the requirements of section 469(c)(7)(b). omnibus budget reconciliation regular, continuous, and substantial. taxpayer’s passive activities for the year. sec. 469(d)(1). the trust’s losses from considered the activities of employees and not fiduciaries because (1) the trustees (...continued)6 therefore, the irs contends, a trust cannot qualify for the section 469(c)(7) discuss the trust’s business. each of the six trustees was paid a fee directly by the instead used the word “taxpayer” in section 469(c)(7) suggests that congress did section 469(c)(7)(d)(i) provides a special rule for determining whether a income tax regs., 53 fed. reg. 5725 (feb. 25, 1988). section 469(h)(4) provides regulations have yet been promulgated for taxpayers that are trusts. see sec. their personal portions of the businesses, not the trust’s portion. despite two of the irs argues that a trust is incapable of performing “personal services” requirements of paragraph (c)(1) of this section by satisfying the requirements of deductions. the notice of deficiency treated the $302,400 in trustee fees as fee activities through a corporation wholly owned by the trust. cf. in re estate of t qualified for the exception found in i.r.c. sec. 469(c)(7). this in its brief, the irs frames the issue of proper characterization of the19 arguments discussed above, namely (1) that trusts are categorically barred from appears to defend this assumption: it apparently contends that the trustee fees contends that the trustee fees were the expenses of the trust’s rental real-estate the irs conceded that the trust is not liable for any accuracy-related2 not employees (salvatore s. aragona, a dentist, anthony f. aragona, who is regulatory guidance regarding the section 469(c)(7) exception is found in respectively. activity. participate. sec. 469(c)(1). under section 469(c)(2), any rental activity is deduction arising in connection with the conduct of a passive activity. sec. 1.469- morrison, judge: the respondent (referred to here as the “irs”) issued are required to be shown as “fiduciary fees”. performed in real property trades or businesses in which the taxpayer and 2006 the trust should be allowed a deduction of $302,400 for “fiduciary fees”. the trustees are individuals, and they work on a trade or business as part of their real-estate operations qualify as real property trades or businesses. therefore the to determine whether a taxpayer materially participates in real-property trades or frank s. aragona, and annette aragona moran--worked full time for holiday characterizing the trust’s rental real-estate activities as passive resulted in a net even if the activities of the trust’s non-trustee employees should be decide whether the trustee fees were expenses of the trust’s rental real-estate the front of its u.s. income tax return for estates and trusts, form 1041, or on reduced by $302,400. thus, the notice of deficiency reclassified the $302,400 section 469(c)(7) exception are (1) to determine whether more than one-half of the “qualifying taxpayer” is defined by the regulation as “a taxpayer that owns at least individuals and closely held c corporations.” h.r. rept. no. 103-111, at 614 annette aragona moran each received wages from holiday enterprises, llc. 2. are the fees that were paid by the trust to its trustees properly characterized who materially participates in a real-property trade or business. this is because whereby trustees manage assets for the trust’s beneficiaries. 1 restatement, trusts the fact that a taxpayer utilizes employees or contract services during the taxable year is performed in real-property trades or businesses in which the committee considers it unfair that a person who performs natural person”. in section 469(i), the internal revenue code does exactly that. determining how a trust may materially participate in an activity, and no or businesses. the trust’s property. during 2005 and 2006 the board met every few months to - 13 - performed their activities as employees of holiday enterprises, llc, and (2) it is a notice of deficiency to the frank aragona trust (sometimes referred to here as 469(d)(1); see also sec. 1.469-2t(b)(1), temporary income tax regs., 53 fed. defined as devices created by beneficiaries to carry on profit-making businesses, real-estate activities, then its rental real-estate activities are passive activities.17 corporations can qualify for the section 469(c)(7) exception. no. 103-213, supra at 546, 1993-3 c.b. at 424. it is true that an individual falls extent that we have not discussed them, we find them to be irrelevant, moot, or during the taxable year in real property trades or businesses in which - 18 - a passive-activity loss is the amount by which aggregate losses from all the6 salvatore s. aragona full-time dentist; limited the taxable year are performed in real property trades or businesses in for a taxable year in which the taxpayer is a qualifying taxpayer[.]”). the term personal services the taxpayer performs in trades or businesses during applies to individuals and closely held c corporations. h.r. rept. no. 103-111, estate development projects. half of the “personal services” performed in trades or businesses by the taxpayer made an election under sec. 469(c)(7)(a)--an election that was binding for “[p]ersonal services means any work performed by an individual in connection it is determined your fiduciary fees of $302,400.00 and $302,400.00, - 3 - items of gross income from a passive activity. sec. 1.469-2t(c), temporary interests. it conducted its real-estate holding and real-estate development real property trades or businesses in which the taxpayer materially the taxpayer materially participates. sec. 469(c)(7)(b)(i). the second test is met more than one-half of the personal services performed in trades or businesses by enterprises to disallow the trustee fees as an “other” expense and the real-estate properties. the losses were reported on the trust’s income-tax returns, some facts have been stipulated by the parties. the stipulated facts are executive trustee (in order to facilitate daily business operations), the trustees fees were not expenses of the trust’s rental real-estate activities. on brief, the irs because of this holding, the losses associated with the trust’s rental real-estate satisfy the section 469(c)(7) exception. brett chmielewski and meso t. hammoud, for respondent. (1) does section 469(c)(7) apply to the trust? yes. fed. reg. 5711 (feb. 25, 1988). passive-activity gross income is generally all redetermine the deficiencies and penalties under section 6214(a). after opinion (feb. 25, 1988). the meaning of i.r.c. sec. 469(c)(7). services performed by activities of the trust’s non-trustee employees. additionally, the irs would have14 how any class of taxpayer other than an individual or a closely held c corporation qualifying under the section 469(c)(7) exception, and (2) that the trust did not - 8 - passive”. requirements of the exception “if more than 50 percent of its gross receipts for the to date no regulatory explanation has been forthcoming * * * [on questions determine a penalty for 2005.) 2003 $86,289.00 $17,257.80 2003 and 2004 years. the notice of deficiency determined that for each of 2005 five trustees were frank aragona’s five children, including paul v. aragona, the (“section 469(c)(2) does not apply to any rental real estate activity of a taxpayer development projects and because they had minority interests in some of the 3d, sec. 2 (2003) (a trust “is a fiduciary relationship with respect to property, * * * in 1986 congress enacted section 469. tax reform act of 1986, pub. l. paul v. aragona executive trustee; full-time treated as materially participating in an activity only if the taxpayer is involved in enterprises, llc 72,000 properties. it employed several people in addition to paul v. aragona, frank s. b. does the trust qualify for the section 469(c)(7) exception? substantial. the test in section 469(h) has two functions. first, it is used to the taxpayer materially participates. the passive loss rules limit deductions and credits from passive subparagraph (b) shall be treated as met for any taxable year if more trustee fees as: “whether petitioner should have reported trustee fee expenses on materially participated in ranching activity. income for the tax year. sec. 1.469-2t(b)(1), temporary income tax regs., 53 held, further, t materially participated in real-property trades corporation materially participates (within the meaning of sec. 469(h)(4)).” h.r. - 22 - formed the trust with him as grantor and trustee and with his five children as the report also stated that a closely held c corporation meets the requirements of reg. 5711 (feb. 25, 1988). a passive activity is any activity which involves the trade or business activities. deductions attributable to passive decision will be entered aragona, and annette aragona moran, including a controller, leasing agents, - 16 - view that congress did not intend the section 469(c)(7) exception to apply to 3. conclusion irs argues here.


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