I will not translate this phrase, but Judge Morrison is a fan of trusts, and proves it in Frank Aragona Trust, Paul Aragona, Executive Trustee, 142 T. C. 9, filed 3/27/14. There’s an independent trustee as well, but he only oversees capital invasions and plays no part in the decision.

Question: can a trust avail itself of real estate professional treatment, per Section 469(c)(7)? It’s not a closely-held C Corp, and it isn’t an individual, but enough of its trustees work on the rental real estate corpus, or through the LLC which the trust wholly owns. The late Frank set the deal up, and son Paul is the boss, with his several siblings either actively working the realty, or along for the ride.

If the personal services and 750-hour tests are met by the trustees, that’s good enough for professional grade.

Judge Morrison: “The IRS argues that a trust is incapable of performing ‘personal services’ because the regulation defines ‘personal services’ to mean ‘any work performed by an individual in connection with a trade or business’. Sec. 1.469-9(b)(4), Income Tax Regs. We reject the IRS’s argument. A trust is an arrangement whereby trustees manage assets for the trust’s beneficiaries. 1 Restatement, Trusts 3d, sec. 2 (2003) (a trust ‘is a fiduciary relationship with respect to property, * * * subjecting the person who holds title to the property to duties to deal with it for the benefit of’ others); see also sec. 301.7701-4(a), Proced. & Admin. Regs. (‘In general, the term ‘trust’ as used in the Internal Revenue Code refers to an arrangement created either by will or by an inter vivos declaration whereby trustees take title to property for the purpose of protecting or conserving it for the beneficiaries under the ordinary rules applied in chancery or probate courts.’). If the trustees are individuals, and they work on a trade or business as part of their trustee duties, their work can be considered ‘work performed by an individual in connection with a trade or business.’ Sec. 1.469-9(b)(4), Income Tax Regs. We conclude that a trust is capable of performing personal services and therefore can satisfy the section 469(c)(7) exception.” 142 T. C. 9, at pp. 17-18.

So Judge Morrison need not decide if the trustee fees are expenses of the real estate operation, because they are active and not passive.

This is a case of first impression. My bet is IRS appeals.