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 of Section 469 [Mattie K Carter Trust v. U.S., 256 F.Supp.2d 536 (N.D. TX 2003)] held that in determining material participation for trusts, the activities of the trust's fiduciaries, employees and agents should be considered. The IRS rejected the broader standard of the court case and limited the standard for a trust's material participation to the activities of its fiduciaries, acting in the capacity of fiduciaries.
Applying that standard to the facts, the IRS concluded that the president's fiduciary powers as special trustee were restricted such that his activities acting in his fiduciary capacity were not sufficient to qualify the trusts as materially participating in the company's activities.
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