This issue has become much more significant with the introduction of a surtax under IRC Section 1411 (commonly referred to as the “Medicare Tax”), which imposes a tax of 3.8 percent on net investment income, which includes income derived from a trade or business that’s a passive activity (within the meaning of IRC Section 469) to the investor.
The IRC and regulations provide detailed guidance for determining whether an individual materially participates in a trade or business for purposes of Section 469. However, there’s little guidance on what constitutes material participation with respect to a trust that owns an interest in a trade or business. Frank Aragona Trust v. Commissioner has been pending in the Tax Court on precisely this issue. The recent decision, which was published on March 27, 2014, was a big taxpayer victory that provides much needed guidance for trusts that own business interests.
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