IRS Advice Concludes Special Trustee’s Company Officer Status Insufficient For Trust’s Material Participation

In a technical advice memorandum (TAM 201317010), the IRS held that the sole means for a trust to establish material participation is through the activities of fiduciaries, acting in their capacity as fiduciaries.

Under the facts in the TAM, two trusts held an interest in an S corporation, which owned a qualified Subchapter S subsidiary (company). The president of the company was a special trustee of both trusts and, under the terms of the trust agreements, controlled all decisions regarding the sale or retention of the stock owned by the trust and all voting of such stock. The trust agreements did not grant to the special trustee any further fiduciary powers over the trusts' assets or with respect to the operations or management of the trusts. The trustee of the trusts did not materially participate in the company's business.

The legislative history of Section 469 provides that an "estate or trust is treated as materially participating in an activity . . . if an executor or fiduciary, in his capacity as such, is so participating." The TAM also noted that the only court opinion addressing how a trust establishes material participation for purposes...