Trust's material participation not limited to trustee's activity.

Q Trust is a testamentary trust established in 1956 under M's will. G has been the trustee of Q since 1984 and manages its assets, including the A Ranch (ranch), operated by Q since 1956. As trustee, G dedicated a substantial amount of time and attention to ranch activities.

Q claimed deductions in 1994 and 1995 for losses of $856,518 and $796,687, respectively, incurred in connection with the ranch operations. On April 8,1999, the IRS issued a deficiency notice to Q for these deductions. The trust paid the disputed amount and made timely refund claims, which the IRS denied. It then filed a refund suit.

The IRS determined that the Schedule F losses were not allowable, because the trustee failed to meet the material participation requirements under Sec. 469(h) and Temp. Regs. Sec. 1.469-5T. It could disallow the losses only if they represented a passive activity loss (PAL) under Sec. 469(a).

Analysis

The parties' cross-motions for summary judgment present an issue of first impression as to a Sec. 469 passive activity. The IRS argues that a trust's "material participation" in a trade or business under Sec. 469(h)(1) should be determined by evaluating only the trustee's activities in his capacity as such. In contrast, Q urges that because the trust (not the trustee) is the taxpayer, material participation in the ranch operations should be determined by assessing Q's activities through its fiduciaries, employees and agents.

According to Sec. 469(c)(1), a passive activity is any activity that involves the conduct of any trade or business in which the taxpayer does not materially participate. Sec. 469(h) provides that a taxpayer materially participates in an activity only if he or she is involved in the operations on a regular, continuous and substantial basis. Under Sec. 469(a)(2)(A), a taxpayer includes any individual, estate or trust.

It is undisputed that Q, not G, is the taxpayer. Common sense dictates that Q's participation in the ranch operations should be scrutinized by reference to the trust itself, which necessarily entails an assessment of the activities of those who labor on the ranch, or otherwise in the ranch business, on Q's behalf.

The IRS'S claim that Q's participation in the ranch operations should be measured by reference to G finds no support within the statute's plain meaning. Such a contention is arbitrary, subverts common sense and attempts to create ambiguity where there is none. The court recognizes that the IRS has not issued regulations that address a trust's participation in a business, and that no case law bears on the issue. However, the absence of regulations and case law does not manufacture statutory ambiguity. In addition, the court only resorts to legislative history when the statutory language is unclear, which, as noted above, is not the case here.

Thus, Q's material participation should be determined by reference to the person who conducted the business of the ranch on Q's behalf, including G. The summary judgment evidence makes clear that the collective activities of those persons with relation to the ranch operations during relevant times were regular, continuous and substantial, so as to constitute material participation.

Alternatively, G's activities as to the ranch operations, standing alone, were regular, continuous and substantial so as to constitute material participation by him, as trustee, during relevant times. Consequently, even if the court were to accept the IRS's legal standard, Q would prevail under the summary judgment record. Q's losses due to the ranch operations were not Sec. 469 PALs.

THE MATTIE K. CARTER TRUST, ND TX, 4/11/03