Recent Court Ruling Can Affect Some Trust Planning Strategies
August 29, 2014
The ways that statutes are written still leave plenty of room for interpretation in any area of law. Estate laws in Florida are no exception to this rule. This seems to have been the case in a recent legal dispute between the Internal Revenue Service (IRS) and a family trust. The ruling could become relevant for some people’s trust planning strategies.
The case involved the court’s interpretation of what it means for a trust to materially participate in business activities. This makes a difference in classification of losses in a business as resulting from passive or non-passive activities. Real estate activities are generally considered passive activities; however, in this particular case, the structure of the trust made this classification not quite as straightforward.
The trustees were also employees of an LLC, which was in charge of managing most of the rental properties held by the trust. The trust listed its loss incurred through the rental property management as non-passive based upon the fact that the trustees were actually acting as employees of the LLC, rather than trustees, during activities related to managing the rental properties. However, the IRS rejected this classification in a deficiency notice.
However, the trust decided to challenge the IRS’ interpretation of the rules in U.S. Tax Court. The court ruled that the trustees were indeed acting as employees of the company, rather than trustees, and that the non-passive classification was valid in this case. Part of the ruling was based upon the fact that the LLC was an S-Corporation, which provides for different rules in determining whether real estate activities could be considered as passive or non-passive activities.
This ruling is significant since it provides precedence in more clearly determining how a court will rule in a similar tax dispute with the IRS, involving a trust in Florida. Therefore, those looking to move forward with similarly structured trusts should consider this when devising their trust planning strategies. However, each individual case will have varying factors and, therefore, this particular ruling may or may not have relevance. In other words, it is always best to have an understanding of not only relevant statutes and case law, but to also be able to apply this knowledge to specific facts of a situation.