
James F. McDonough
Of Counsel
732-568-8360 jmcdonough@sh-law.comFirm Insights
Author: James F. McDonough
Date: July 9, 2013
Of Counsel
732-568-8360 jmcdonough@sh-law.comThe 3.8% income tax surcharge (the “Surcharge”) is a new concern faced by trustee. The current investment environment poses challenges to invest in a manner that will produce enough income to satisfy beneficiaries. Trustees of trusts that own business assets may avoid the surcharge if the income earned from the business is deemed active rather than passive in nature. The determination of income as active or passive is difficult for several reasons. The rules, called the passive los rules, require material participation on the part of the trustee in order to characterize the trust’s income as active. These rules were enacted to put a stop to the tax shelter industry and are intentionally restrictive. There are few cases and little in the way of guidance on what actions constitute material participation on the part of the trustee. A Trustee is faced with a dilemma. Does the trustee take the safe route and pay the extra tax? In the alternative, does the trustee attempt to structure his actions so that participation is material, regular and continuous.
A recent IRS ruling applied the passive loss rules to two trusts that owned an S corporation. The S corporation was the sole owner of a qualified subchapter S subsidiary (QSub) corporation, which was the operating company. The same person was trustee of both trusts and another person was the special trustee and president of the QSub. The taxpayer argued that the management decisions and personal supervision of the business by the special trustee should be attributed to the trusts thereby making the income active rather than passive and escaping the imposition of the Surcharge.
The ruling analyzed the activities of the special trustee to assess whether they were regular, continuous and substantial. The ruling held that simply voting shares of stock did not constitute material participation and therefore the income was passive and subject to the Surcharge. The ruling focuses on the fact that the special trustee was limited in his authority by the terms of the trust and therefore special trustee could not have materially participated. Stated another way, he was acting as an officer and not as trustee.
This issue of material participation will arise more frequently as trust laws in more states are amended to permit the use of special trustees to administer businesses and other special assets. Previously trust companies were reluctant to administer special assets because trustees were limited by a more restrictive standard. A special trustee may administer a business as a prudent businessperson would do without liability to the trustee.
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
If you’re considering closing your business, it’s crucial to understand that simply shutting your doors does not end your legal obligations. Unless you formally dissolve your business, it continues to exist in the eyes of the law—leaving you exposed to ongoing liabilities such as taxes, compliance violations, and potential lawsuits. Dissolving a business can seem […]
Author: Christopher D. Warren
Contrary to what many people think, corporate restructuring isn’t all doom and gloom. Revamping a company’s organizational structure, corporate hierarchy, or operations procedures can help keep your business competitive. This is particularly true during challenging times. Corporate restructuring plays a critical role in modern business strategy. It helps companies adapt quickly to market changes. Following […]
Author: Dan Brecher
Cryptocurrency intimidates most people. The reason is straightforward. People fear what they do not understand. When confusion sets in, the common reaction is either to ignore the subject entirely or to mistrust it. For years, that is exactly how most of the public and even many in law enforcement treated cryptocurrency. However, such apprehension changed […]
Author: Bryce S. Robins
Using chattel paper to obtain a security interest in personal property is a powerful tool. It can ensure lenders have a legal claim on collateral ranging from inventory to intellectual property. To reduce risk and protect your legal rights, businesses and lenders should understand the legal framework. This framework governs the creation, sale, and enforcement […]
Author: Dan Brecher
For years, digital assets operated in a legal gray area, a frontier where innovation outpaced the reach of regulators and law enforcement. In this early “Wild West” phase of finance, crypto startups thrived under minimal oversight. That era, however, is coming to an end. The importance of crypto compliance has become paramount as cryptocurrency has […]
Author: Bryce S. Robins
Earlier this month, the U.S. Supreme Court issued a decision in Ames v. Ohio Department of Youth Services vitiating the so-called “background circumstances” test required by half of federal circuit courts.1 The background circumstances test required majority group plaintiffs pleading discrimination under Title VII of the Civil Rights Act to meet a heightened pleading standard […]
Author: Matthew F. Mimnaugh
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.
Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.
Let`s get in touch!
Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!