Tackling Taxes

On Mar 27, 2014, the Tax Court held in Frank Aragona Trust that a trust materially participated in its rental real estate business. In this column, the authors will direct their attention to the implication of Frank Aragona Trust and a few planning considerations on the net investment income tax (NIIT) for trusts. Under Code Sec. 1411(c)(1)(A), net investment income (NII) includes income from any trade or business that is a passive activity (within the meaning of Code Sec. 469) with respect to the taxpayer. Therefore, a taxpayer is not subject to the NIIT on income from a trade or business in which the taxpayer materially participates. With respect to trusts, the lingering issue is what constitutes material participation. Perhaps the Frank Aragona Trust decision provides you with a road map on how to structure the transfer of trade or business interests in flow-through entities to family members in order to minimize the impact of the NIIT.