Taxpayer Victory Helps Trusts Holding Business and Real Estate Avoid Tax


One of the most vexing tax issues remaining unresolved since the 1986 enactment of the passive loss (PAL) rules is whether business or rental income earned by a trust can be active income and whether business or rental losses sustained by a trust can be active losses. The enactment of the 3.8 percent net investment income tax (NII Tax) increases the significance of the uncertainty surrounding this issue. The taxpayer’s total victory in the March 27, 2014, tax court decision, Frank Aragona Trust v. Commissioner, provides a partial answer to this question just in time for the 2013 tax filing season. Because the Internal Revenue Service (IRS) may yet appeal this case, it does not definitely resolve these issues.

Income or losses for PAL purposes are generally active when the taxpayer “materially participates” in the business or real estate activity. Congress enacted the PAL rules to prevent a taxpayer from taking business or rental activity tax losses against portfolio, salary and other income, unless the taxpayer materially participated in the business or rental activity generating the loss. These rules are significant for purposes of the NII Tax because income from a business or real estate activity if active is exempt from the NII Tax and if passive is subject to the NII Tax.

Please see full alert below for more information.

LOADING PDF: If there are any problems, click here to download the file.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© McDermott Will & Emery | Attorney Advertising

Written by:


McDermott Will & Emery on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:

Sign up to create your digest using LinkedIn*

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.

Already signed up? Log in here

*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.