In 2014, a significant Tax Court opinion provided some long-awaited guidance as to the application to trusts of the tax rules limiting losses incurred in passive activities. In Frank Aragona Trust v. Commissioner,1 the Tax Court held that a trust can qualify as a real estate professional under the “passive activity rules”2 based on the participation of the individual trustees and their involvement in the underlying activity. Clarification of this issue has been sought for many years in connection with the passive activity rules, but has now assumed considerably increased importance and interest since the enactment of the additional 3.8 percent Medicare tax,3 which became effective in 2013.
As discussed below, the passive activity rules only affect taxpayers whose business activity generates a loss; if the activity is characterized as “passive,” use of the loss is limited. However, with the introduction of the new 3.8 percent Medicare tax, individuals and trusts, both of whom are subject to the tax, also may need to determine whether all their business interests are “passive” or “active.”
