Aragona Presentation

1. Trusts, Material Participation, and
the Net Investment Income Tax
The Frank Aragona Trust Case

2. 142 T.C. No. 9
UNITED STATES TAX COURT
FRANK ARAGONA TRUST, PAUL ARAGONA,
EXECUTIVE TRUSTEE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
Docket No. 15392-11. Filed March 27, 2014
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3. FRANK
ARAGONA
TRUST
SALVATORE
ARAGONA
DENTIST
ANTHONY
ARAGONA
DISABLED
CHARLES TURNBULL
ATTORNEY/INDEPENDENT
TTEE
THESE TRUSTEES WERE
FULL TIME EMPLOYEES OF
HOLIDAY ENTERPRISES, A
WHOLLY OWNED LLC
PAUL ARAGONA
FRANK S.
ARAGONA
ANNETTE
ARAGONA
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4.  How does a trust materially participate in an
activity?
 Can a trust qualify as a real estate professional?
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5. Material Participation
o Section 469(h)(1)
 Regular
 Continuous, and
 Substantial
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6. Treasury Regulations 1.469-5T
1) The individual participates in the activity for more than 500 hours
during such year;
2) The individual's participation in the activity for the taxable year
constitutes substantially all of the participation in such activity of
all individuals for such year;
3) The individual participates in the activity for more than 100 hours
during the taxable year, and such individual's participation in the
activity for the taxable year is not less than the participation in the
activity of any other individual for such year;
4) The activity is a significant participation activity for the taxable
year, and the individual's aggregate participation in all significant
participation activities during such year exceeds 500 hours;
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7. Treasury Regulations 1.469-5T
5) The individual materially participated in the activity for any five
taxable years during the ten taxable years that immediately
precede the taxable year;
6) The activity is a personal service activity, and the individual
materially participated in the activity for any three taxable years
preceding the taxable year; or
7) Based on all of the facts and circumstances, the individual
participates in the activity on a regular, continuous, and
substantial basis during such year.
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8. Real Estate Professional Exception
o Section 469, all rental real estate activities are passive
o Except, for “Real Estate Professionals” (Section
469(c)(7)(B))
 more than one-half of the personal services performed in
trades or businesses by the taxpayer during such taxable
year are performed in real property trades or businesses in
which the taxpayer materially participates, and
 such taxpayer performs more than 750 hours of services
during the taxable year in real property trades or businesses
in which the taxpayer materially participates.
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9. o How does a trust materially participate in an
activity?
 “Considering the activities of all six trustees in their
roles as trustees and as employees of Holiday
Enterprises, LLC, the trust materially participated in its
real-estate operations.”
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10. o Can a trust qualify as a real estate professional
under Sec. 469(c)(7)?
 “As to whether the trust qualifies for the section
469(c)(7) exception, however, the IRS has limited its
arguments to the two arguments discussed above,
namely (1) that trusts are categorically barred from
qualifying under the section 469(c)(7) exception, and
(2) that the trust did not materially participate in real-property
trades or businesses. In the context of the
arguments raised in this case, therefore, we hold the
trust meets the section 469(c)(7) exception for the
years at issue.”
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11. LONG-TERM
CAPITAL GAIN
RENTAL RE LOSSES
$0 NET
INCOME
Example: Electing Small Business Trust (ESBT)
with $1,000,000 of long-term capital gain and
$1,500,000 of rental real estate losses
Trust does not materially participate in the rental
real estate activities.
$237,546 of tax ($200,000 of capital gains tax &
$37,546 of NIIT)
$1,500,000 of passive activity loss suspended,
carried forward
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12. NET
OPERATING
LOSS
$0 NET
INCOME
Example: ESBT with $1,000,000 of long-term capital
gain and $1,500,000 of rental real estate losses
Trust elects to group all rental real estate activities
under Treas. Reg. §1.469-9, trust participates in the
rental activities and the trust qualifies as a real
estate professional under Sec. 469.
$0 tax is due
The $1,000,000 long-term capital gain is offset by
$1,000,000 of rental real estate losses. The excess
$500,000 loss generates an net operating loss which
can be carried back two years or carried forward
twenty years.
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